Standing Committee A

[Mr. Joe Benton in the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Schedule 16

Excluded business and income

Amendment moved [this day]: No. 208, in page 84, line 32 [Vol II], leave out paragraph 11.—[Mr. Francois.]

Mark Francois: I welcome you back to the Chair, Mr. Benton.
When the Committee rose this morning, I was moving amendment No. 208. As I was saying, in other jurisdictions, such as the United States, that have a developed and successful real estate investment trust package, the restriction represented by paragraph 11 does not apply. Recently, the Financial Times estimated that more than $300 billion is invested in US REITs. In the American example, it is very common for REITs of REITs to be set up. That creates a potentially attractive retail product that helps to spread risks, particularly for small investors, whom, as I said this morning, the Government are presumably keen to attract into the market.
The British Property Federation has considered the amendment and argued in its favour in the following terms:
“We believe that REITs should be able to invest in other REITs without such an investment being treated as part of the taxable income. The ability to make such investments will be viewed as attractive by the management of REITS and shareholders and indeed would be viewed as normal commercial activity by the property industry. As currently drafted, the restrictions imposed by this paragraph of Schedule 16 will therefore restrict normal commercial investment strategies and restrict the growth of the UK REIT market.”
If the Economic Secretary disagrees with the amendment, I ask him to explain precisely why there is an objection to the eventual establishment of REITs of REITs. As a form of investment vehicle, they might well help attract a wider number of potential new investors—as I said, presumably the Government are keen to do that.
Our amendment would go some way to enabling such additional forms of REITs to be established in the United Kingdom, and thereby assist UK REITs to catch up with competitor REITs businesses in other investment markets. Having put that case to the Economic Secretary, I look forward to his reply.

Edward Balls: As the hon. Gentleman acknowledged, the amendment would extend the UK REIT regime beyond the Government’s policy intentions. It would not be consistent with the objectives of our reform to the property investment market, as I shall explain in more detail in a second. Before I do, let me say a couple of words about schedule 16 more generally and make a couple of extra points.
As we discussed earlier, clause 104 provides the definition of “property rental business” that is used to determine the activity that qualifies for exemption from corporation tax within the UK REIT regime. That definition is critical to achieving the focus of the regime and protecting the Exchequer from significant extra costs.
In respect of that definition there are, however, a number of types of business and income that fall within the normal schedule A definition, but do not fit within the Government’s policy aims for UK REITs. Schedule 16, to which I shall come in a moment, sets out a number of exclusions and provides a regulatory power for those items to be changed in future. As I said earlier, we passed draft regulations that affect schedule 16 to Opposition Members, and to the public on websites, last week.
The type of income that the regime is intended to capture within a UK REIT is what I would describe as rents from bricks-and-mortar assets. The items in schedule 16, such as incomes from the sites of mobile phone masts, wind turbines or utility cables, do not fit within that remit. The regulatory power is important because the market is fast changing and different asset classes that do not exist today may emerge.
Those Committee members, such as the hon. Member for Rayleigh (Mr. Francois), who have studied the draft regulations in detail will have seen that in them we already envisage two changes to the list in schedule 16. The Government have chosen to release those proposed changes in draft regulations, to allow industry representatives and other interested parties to comment on them.
Subject to our reaching consensus on those proposed changes—which, as I said, came from points made to us recently by the Law Society, the British Property Federation and others—we intend to introduce on Report amendments to schedule 16 on those two points, rather than leaving them just in the regulations. We wanted to get them into the Bill, but when they came up it was too late to propose for today’s sittings an amendment whose drafting we could be sure met the concerns expressed to us. We do not want to leave the two issues until the autumn, because we know that changes need to be made, so we hope, with the agreement of the House, to introduce amendments on Report. I think that that is an unusual thing to do but, as I said this morning, it shows that we intend to make changes when it is shown on the basis of consultation that we need to do so, and to keep matters under review.
As I said, the two changes come from points put to us by the Law Society and the British Property Federation. The first change is to clarify that owner-occupied property is not tax-exempt property for a UK REIT. We shall discuss that issue when we reach clause 107. We need to be clear that owner occupation is outside the ring fence, and it was put to us that we needed to make that clearer than it was in the provisions. The purpose of the change in schedule 16 is to ensure that if owner-occupied property is held, it is kept outside the tax-exempt ring fence, rather than causing a breach of a regime condition. We shall clarify that in an amendment on Report, subject to continuing consultation on the precise detail of the amendment.
The second change is to extend the current exclusion of property held as part of a development trade to property held in connection with any type of property trade. In this context, a property trade generally refers to a business holding properties for the purpose of generating profit from resale. That is distinct from investment in property held for long-term rental purposes, which is the focus of the UK REIT regime.
The change as contained in the regulations is a response to representations made on the legislation. The concern is that there would be a double charge to tax where a company holding certain types of trading property entered the regime. The change ensures that all trading property is held outside the ring fence, so that no entry charge is collected and the issue of a double charge is removed. We hope to clarify both points in detail on Report.

Mark Francois: I am listening carefully to the Economic Secretary and I am grateful for what he has said, but presumably his second point has a particular bearing on clause 111.

Edward Balls: Yes, it does. I am sure that we will return to those issues when we reach clause 111, but the appropriate place to make the change is in schedule 16. It is in the regulations that were published last week and that pertain to schedule 16. That is why I am raising the issue at this stage, although in terms of the content of the legislation it is a clause 111 point.
Amendment No. 208, which we have heard about from the hon. Gentleman, would remove from the list of excluded classes of income or profit any dividends received by a UK REIT that arose from shares held in another UK REIT. Presumably the intention is to allow within the regime investments that are a proxy for property investments rather than actual property investments. However, it is not our aim to provide such a tax exemption. Our aim in introducing UK REITs has been to create a regime for investing in property that removes existing distortions in the market. Those distortions arise where a company is directly managing a portfolio of assets that is generating property rental income; we are not talking about the shares held by such companies in other companies.
If the amendment was accepted and such a fund-of-REITs structure was allowed, it would be necessary to add complex legislation to ensure that all the other rules of the regime, such as the 90 per cent. distribution and balance of business tests worked effectively. Otherwise, the Government could not be assured that property distributions paid to the top company of a UK REIT group were paid out to investors.
Let me give more detail. A key problem could relate to the treatment of the REIT shares in the hands of the holding REIT, given that they may give rise to dividends that are treated as coming under schedule A and normal company dividends and the proportion of each would vary from year to year. In turn that would mean that the proportion of the shares used in the property rental business could change from year to year. That would give rise to complex part-disposal computations and taxable capital gains each time the proportion changed. We would need a detailed set of rules to impose such a treatment. Given that it was never our intention to support a REIT of REITs structure but to have a REIT regime that supported direct investment in property, it is our view that it would be wrong to proceed with the amendment. I would therefore invite the Committee to reject it.

John Hemming: Not having been necessarily briefed on the amendment by my colleagues, I am inclined to support the Government, much as it pains me. The concept that REITs might invest in REITs much like the situation where the zeroes were investing in each other causes some concern. Obviously, with the potential risk from gearing in those situations, that would make them a less secure form of investment. I would be uncomfortable with a tax regime that encouraged REITs to invest in each other, so I would be inclined not to support the amendment.

Mark Francois: First I shall respond to the Liberal Democrat speech. The hon. Gentleman said that he had not been briefed, but part of the Government’s argument was that they were worried about the capital gains tax implications and the Liberal Democrats announced today that they want to increase the tax take from capital gains by a factor of four, so I am surprised by the Lib Dem position.
Turning directly to the Government’s argument, I can understand why they take such a position at this stage. All I would say is that if one looks at the experience in other countries, particularly the United States, allowing REITs of REITs to develop has been important in bringing a lot of money into the property market. I wonder whether this is a position that the Government are adopting today but might reconsider in the future, depending on the extent to which the regime takes off in practice. I understand why, at least today, the Government are reluctant to yield on the matter. As this was a probing amendment, I shall withdraw it.
I want to make two brief points. I can confirm to the Economic Secretary that I spent an enjoyable weekend last weekend reading through all the regulations so that I would be ready to debate REITs on Tuesday, and I am grateful to him for having complied with the deadline that he promised the Committee of having them out on 1 June. I tabled a point of order a week before to ensure that they would be ready and he kept his word. I place on the record the fact that we are grateful that he did that.
The Economic Secretary also mentioned two amendments that the Government will table on Report. We obviously look forward to seeing the detail of the amendments. I am grateful that he has confirmed that the Government will want to return to REITs on Report. There is always competing time for different aspects of a Finance Bill on Report, so I put down a marker that we, the Opposition, would like to return to REITs. The Economic Secretary has said that the Government want to too and I am sure that the usual channels will have taken careful note of that. I look forward now to debating REITs with him on Report in July.

Edward Balls: I probably ought to have taken the opportunity to welcome the hon. Member for Birmingham, Yardley (John Hemming) to the Committee. I omitted that and I apologise. If he chooses to join our debates on Report we may have a further opportunity to debate REITs. I look forward to the REITs discussions at that stage. Clearly, as I have talked about the two amendments, there will need to be time to debate those and other matters on Report.
On the point about the US made by the hon. Member for Rayleigh, I just want to say to him that the US and UK tax systems are quite different. We have to work within the scheduler system that applies in the UK when we draw up an appropriate framework for the UK REIT regime. If the core of the regime were to move from its present alignment with the property income taxable under schedule A, that would add layers of extra complexity. It is that extra complexity, given our tax system, that we are seeking to avoid.

Mark Francois: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed,That this schedule be the Sixteenth schedule to the Bill.

Rob Marris: I read the schedule in conjunction with the draft Real Estate Investment Trusts (Excluded Business) Regulations 2006. Like the hon. Member for Rayleigh, I am grateful to the Government for producing the draft statutory instruments by 1 June.
I read the schedule and the regulations together, and I hope that my hon. Friend the Economic Secretary can clarify a point on them. In large parts of the country—certainly in England—there are many houses on long leasehold that are subject to ground rent. As the hon. Member for Birmingham, Yardley will know, that is certainly the case in the west midlands where my constituency is located. In recent years there has been a business trend for companies to buy up the rights to receive ground rents on long leases for houses, such as 99-year leases.
Under the Leasehold Reform Act 1967—passed by a Labour Government—owner-occupiers of such houses can under certain conditions buy up the landlord’s right to ground rent, based on a multiplier of that rent, the multiplier usually—I think—being 11. The property then becomes freehold property rather than long leasehold. My question is whether it is possible for a real estate investment trust that is a listed company—and which fulfils the various other criteria—to qualify under the draft regulations if that company is simply in the rental business relating to long leaseholds.

Edward Balls: I am grateful to my hon. Friend for that question. As Members can see, I prepared for a detailed debate on the regulations precisely because I thought that he might find a question that would be difficult for me to answer.

Mark Francois: He is breaking you in gently, Ed.

Edward Balls: Yes indeed. If I reach into my file of papers, I can confirm that as long as the company concerned complies with the other rules—in particular the 75 per cent. rule concerning rental business—it will be possible for such a company to qualify.

Brooks Newmark: I have a brief point relating to the Economic Secretary’s comment on the comparison between the tax regime in the US and that in the UK. Unfortunately, those who are involved in the REIT market look at it on a global basis, and therefore one has to consider tax regimes all over the world, including in the United States, notwithstanding the complexity of the UK’s own tax regime. Will the Minister reflect on that point and give us his comments?

David Gauke: The Minister referred to representations by the Law Society and he will be aware of the society’s representations on the classes of income and profit that are set out in part 2 of schedule 16. I assure the Committee that my remarks have nothing to do with Mrs. Gauke, although it was Mrs. Gauke’s ex-firm that made the representations—it is a very small world, is it not, but I fear that Mrs. Gauke’s contributions to the Committee have now been exhausted and that she has nothing further to add.

Mark Hoban: You are on your own now.

David Gauke: Indeed I am, so I may struggle somewhat. None the less, the Law Society’s representations highlighted a concern about compliance costs that REITs might have to incur in respect of rent from telecoms masts, wind turbines and the like. Have the Government considered those representations and do they have any thoughts on whether there should be qualifications whereby the exclusion does not apply when that rental income is incidental to property rental business?

Edward Balls: I had anticipated a discussion on car parks that has not yet arisen.

David Gauke: Give us the answer anyway.

Edward Balls: It is 107. However, I can give some reassurance on the point about telecommunications masts, because we looked at the issue after the representations had been received, and the judgment that we have reached is that it is rare for such a rent to be an incidental part of a property rental business. The term “incidental” refers to services that are provided to tenants as a part of providing the accommodation, such as cleaning common parts of the building. The provision of a mobile phone mast in a shopping centre that allows shoppers to use their mobile phones in the building might qualify under the regime, but a relay mast or a booster just for one geographical area would not. I hope that that clarifies matters.
On the broader point, of course we are aware that we are in a global marketplace, and we want the City of London to continue to be a strong centre not just for the British property market but for expertise in investing in property markets worldwide. That is why we have gone to such lengths to consult and to learn lessons from other countries that have gone down this road; why we have been very careful on a number of issues; why the commercial property market has been closely consulted, and why we are encouraged by the fact that a number of the large UK commercial property companies have indicated that they will establish UK roots. I can offer reassurance on that point.
Picking up the comments that the hon. Member for Rayleigh made earlier, an important part of the tax regime, not just for UK REITs and the property industry, but more broadly for British business, is our capital gains tax regime. As hon. Members will know, it has been substantially reformed since 1997 to reduce the rate of capital gains on long-term investments from 40 per cent. to 10 per cent. Like the hon. Member for Rayleigh, listening to “Today” this morning, I was fascinated to hear about the tax cuts that were going to be offered by the hon. Friends of the hon. Member for Birmingham, Yardley, and by the scale of resource that they are going to raise from large cars and capital gains tax.
I can assure the right hon. Member for North-West Hampshire (Sir George Young) that, independent of his concerns about large cars in the City, if £12 billion is going to be raised from large cars and capital gains, there will not be much of a City left. Like the hon. Member for Rayleigh, I am looking forward to the further details.

Question put and agreed to.

Schedule 16 agreed to.

Clause 105 ordered to stand part of the Bill.

Clause 107

Conditions for tax-exempt business

George Young: I beg to move amendment No. 218, in page 98, line 23 [Vol I], at end insert—
‘(4A) Condition 2A is that a percentage of the assets of the property rental business to be prescribed in regulations made by the Commissioners for Her Majesty's Revenue and Customs is invested in residential property.'.
The good news is that this is the only amendment that I have tabled to this Bill, exercising commendable self-restraint. Also, the pitch for it was rolled fairly substantially this morning, which means that I can set out the case for it relatively briefly. In a nutshell, the amendment would allow the commissioners of revenue and customs to specify that a certain percentage of the assets of a company that wanted to be a REIT be invested in residential property.
There are three reasons for that. The first is that it delivers the Chancellor’s policy. I quoted from his Budget speech this morning. That quotation is now somewhere in the entrails of Hansard, so I shall not repeat it. However, he made it clear that one reason for promoting the new vehicle was to encourage investment in residential property. Without an amendment along these lines, there is no guarantee at all that one penny of the assets of a REIT will be invested in residential property. In a sense, this is the Kate Barker amendment. It seeks to ensure that the vehicle that she proposed and designed is used for the purpose that she had in mind.
The second reason arises from what the Economic Secretary said this morning when he was dealing with clause 104 stand part. I think that he said that he would be concerned if there were no investment in residential property. He certainly said that he would keep the matter under review. However, all that he will be able to do without an amendment or a provision like my amendment will be to express concern. He will not be able to do anything, because the condition for a REIT is set out in clause 106. As I understand it, unless he has the powers that amendment No. 218 would give him, he will be unable to do anything to require a REIT to invest in residential property, so it would enable concern to be translated into action.
The third reason for supporting the amendment is to avoid a difficult weekend for the Economic Secretary. I do not want him to have to go back this evening and tell the Housing Minister that he encouraged the Committee to vote down an amendment promoting investment in housing. So if he has his own self-interest at heart I hope that he will look sympathetically at the amendment.
We all see in our advice bureaux families in housing need who, for whatever reason, cannot immediately be rehoused by the local authority or by the housing association, probably because they do not have enough points. For many of them the alternative is to stay where they are, in many cases sharing with their parents, or the local authority will suggest that they move into private rented accommodation. The more progressive local authorities have a good dialogue with the responsible landlords in their area. They have rent deposit schemes, they pay the rent direct and a viable private rented sector in an area offers an opportunity for households in housing need to get a home of their own until such time as they score enough points to be rehoused by the local authority.
Home ownership is beyond the means of those households, and homebuy, shared ownership and similar derivatives are also not possible. At the moment there is the buy-to-let market, which has thrived and which I welcome. But my view is that the buy-to-let market, which is largely dominated by the smaller landlord, should be complemented by a parallel market of serious long-term institutional money invested in good quality accommodation for rent, managed by registered social landlords or other responsible agents to provide an increased supply of housing for such households. My amendment simply enables that provision to be made. As I said, I think that was what REITs, PIFs, HITs, or whatever they were called initially, were all about.
In a nutshell, the amendment helps the Chancellor achieve the ambition he set out in his Budget and it helps the Minister for Housing and Planning in her ambition to increase the supply of good quality accommodation for rent, but most importantly it helps families in housing need. Against that background, I hope that the Minister will feel that he can smile on the amendment.

John Hemming: This perhaps goes to the nub of our perspective on REITs: will they encourage a greater availability of affordable properties? It is an interesting amendment, but whether it is the best way of achieving that is unclear. All hon. Members have to be aware of the difficulties in housing. Yes, there are a small proportion of people who wish to be housed by the council because there is right to buy, but generally there is a problem in finding affordable housing to rent, particularly where revenue from the local authority is accepted. All the changes to housing benefit and the like that are being debated complicate the market. It means that REITs potentially offer a good way forward to raise revenue, perhaps linked with registered social landlords and perhaps with social landlords who are not registered.
Over lunch I met a committee member from the Stockfield Community Association which is a social landlord, but not regulated by the Housing Corporation. Because its compliance costs are substantially lower, it ends up in a stronger financial position. In a sense it is a REIT equivalent, but it is a social enterprise rather than one owned by private investors. Will we get more affordable property that people can rent, remembering that in essence the only sort of society where everyone owns their own property is one where the properties are all mud huts? There needs to be a good rented market. Will REITs provide that, and is the amendment a good way of ensuring that they do? There is the further matter that I would not wish to see an environment where more properties are produced but people who are dependent on the local authority or central Government for housing benefit are excluded from the process.

Brooks Newmark: I am delighted to support my right hon. Friend the Member for North-West Hampshire. The REITs regime that the Government have proposed is hedged about with a number of qualifications and restrictions that aim to prevent investors from abusing the tax exemptions. There are six conditions in clause 106, four in clause 107 and two in clause 108. REITs will be subject to an entry charge, a maximum shareholding requirement and a limit to the size of a single investment as a percentage of the total property portfolio. At the same time, they will be required to invest in several properties, deliver a minimum profit distribution and adhere to an interest cover ratio. Industry analysts have broadly welcomed those restrictions, if only because they are less stringent than was feared and because some of the conditions that caused the greatest concern have been softened. Nevertheless, it is baffling that among all the restrictions, the proposals do not make any requirement that REITs should invest a percentage of assets in residential property.
The form that REITs will take has been defined, but their purpose has not. I hope that the purpose is of greater importance than the form. The REITs regime appears to be suffering from an identity crisis that would, at least in part, be addressed by the amendment. We need look only as far as the Chancellor’s rhetoric on the REITs regime to appreciate that it has evolved into something very different from the purpose that was originally envisaged. In this year’s Budget, he said:
“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[Official Report, 22 March 2006; Vol. 444, c. 293.]
As I have said, one of the reasons why REITs are so successful in the USA is that they are not necessarily subject to a listing requirement. The first part of the Chancellor’s statement interests me, because much of the justification for the development of the UK REITs regime stems from the Barker review of housing supply, of which we heard much earlier in our debates. The interim report of the Barker review acknowledged that
“there may be merit in the government looking at ways to promote greater interaction between institutional investors and the residential property market.”
The final report was more explicit about the potential benefits of developing a transparent investment vehicle for the residential property market. It said that the benefits would include an increase in new build, better maintenance, greater stability in the market and more involvement in the management of subsidised housing. Although the Government have since determined that a REIT regime would also be of benefit to the commercial property market as well, the Barker review was the original catalyst for its development.
The failure to include any conditions on investment in residential property is an invitation to the law of unintended consequences. Instead of giving investment in residential property a shot in the arm, there is a risk that REITs will, in practice, make little contribution to the property market, because there is already no shortage of methods by which it is possible to invest in the commercial property market. We need look only at how the market is reacting to the Government’s proposals.
I return to the imposition of a listing requirement, which has severely restricted the class of those who stand to make use of the REIT regime. As the Economic Secretary said this morning, it has been announced in the past few days that Britain’s only listed residential property company, Grainger Trust, will not convert into a REIT because the regime does not fit its business model.

Edward Balls: Is the hon. Gentleman suggesting that that announcement has been made because of the alternative investment market listing requirement?

Brooks Newmark: I will get on and finish my point if the Economic Secretary will be patient.

Edward Balls: The answer is no.

Brooks Newmark: And I shall help the Economic Secretary to flesh out the point that he was trying to make. The reasons are twofold: first, the distinction that has been imposed between rental income and sales profits, and secondly the distinction between investment and trading properties, which is the subject of amendment No. 209, tabled by my hon. Friends. The revelation that the only residential property company that could enter the REITs regime will not now do so is worrying.

Rob Marris: The hon. Gentleman has referred twice, I think, to what he calls the only listed residential property company. He has not mentioned McCarthy & Stone, for example, which I believe is a listed residential property company. That makes two.

Brooks Newmark: The hon. Gentleman makes an important point, but we focused primarily on the Grainger Trust this morning and I wish to deal with it in my remarks now.
I turn briefly to the Economic Secretary’s question, as it is an important point. The Conservatives believe that the alternative investment market will increase the overall size of the market by allowing companies to be listed on it. I am trying to address amendment No. 209, which is focused on the housing market and trying to stimulate investment in it.
Of more concern is the news that Grainger is currently setting up a Jersey property unit trust with £220 million worth of market-rented homes. Given that the REITs regime was also intended to make investment in the UK property market accessible and stop the drain of investment to offshore vehicles such as the Jersey property unit trust, we must question whether REITs will be fit for purpose.
On the other hand, there have been some positive indications from the residential property market. The Financial Times reported last week that a consortium of 17 housing associations, which collectively own more than £10 billion worth of property, is looking to launch a REIT next year. We are beginning to see evidence of a polarised property market in which most REITs—this is my concern—will focus on commercial property, while perhaps a handful are formed to invest in residential property. I question whether those outcomes were foreseen when REITs were first suggested as a means by which to stimulate the residential market. Quite to the contrary, investment in residential property has become merely an adjunct to investment in the commercial property market.
Investment in housing should not be perceived as an inconvenient corollary to the REITs regime; it should be integral to the scheme itself. The best way in which to facilitate that is to require a percentage of total investment into the residential property market. A requirement that a percentage of assets should be invested in residential property, which my right hon. Friend the Member for North-West Hampshire seeks, would ensure that REITs are focused on the need that they were originally intended to address.

Rob Marris: I congratulate the right hon. Member for North-West Hampshire on his amendment and the views that he has put forward. I very much share his goal as, I suspect, do all Labour Members. However, I am not attracted to his amendment for two reasons, the first of which is its practicality.
I am sure that the right hon. Gentleman will correct me if I have misread the amendment, but it seems to say that any individual REIT must have at least residential property, whatever percentage might be specified, as well as commercial property, although it could be 100 per cent. residential. So, he seeks to introduce a floor, but that would introduce the concept of a kind of mixed REIT. In mature capitalism, companies that thrive tend to be those that specialise. I suspect that the effect, in practical terms, of his amendment, would be that we would have what I would call mixed REITs and a situation in which a broadly or predominantly commercial property REIT, which had—under regulations made under the amendment—20 per cent. of its holdings in residential, for example, would be even more likely to buy in that 20 per cent. of rental residential properties.
That brings me to my second concern, which is shared by the right hon. Gentleman and others. With a REIT regime, I am particularly keen to encourage new build to increase the supply of residential property. I do not have a crystal ball, but what I have just sketched out is that if a predominantly commercial property REIT had to have some kind of floor target of residential, it would be likely to buy that in, rather than go into something that it knows even less about and in which it is even less specialised: building residential property to rent.
The Government’s approach is very cautious at the moment, in that only listed companies can be REITS, which is probably desirable, but I would prefer us to move towards a regime in which there is encouragement for new-build residential property REITs. I will throw out an example to the Economic Secretary. If a REIT that had more than, say, 80 per cent. of its holdings in residential property and those holdings were new build by that REIT, that company could be listed on AIM rather than on the main stock exchange. It would be cheaper to get listed on AIM and there would be the attraction of the lighter-touch regulation of an AIM-listed company. That might encourage residential property REITs to do new build. Companies would get to list under the AIM regime only if they were a predominantly residential property REIT and if a large proportion of their residential property had been built by that residential REIT. AIM-listing would encourage and foster the increased supply of private rented accommodation, which the right hon. Member for North-West Hampshire and I, among others, wish to be encouraged. There is a better mechanism than his amendment.

Stewart Hosie: I broadly welcome the REITs regime and initiative. My concerns with the amendment are similar to those of thehon. Member for Wolverhampton, South-West (Rob Marris). The amendment suggests that a proportion should be invested in residential property. Had it said that a proportion should be invested in the development and building of residential property, I would have supported it immediately because there are huge opportunities under the REITs regime to provide rented accommodation particularly in areas in which, at the moment, there is little or none.
The danger with the amendment is that, as the hon. Gentleman said, a business may simply buy in to residential property in an area in which there is a solid rental market and guaranteed high rental incomes. So I have concerns with the way in which the amendment is worded. If it was to return, worded differently, on Report, I am sure that we would all take a different view.
My concerns about providing new build residential property are similar to those of the hon. Gentleman and others. The listing requirement is one of the major downfalls. The stock exchange requirement with an entry level of at least £750,000, a minimum fundraising entry level of £750,000 and ongoing advisory costs of £250,000 a year minimum with a commission of 2 to5 per cent. is an onerous burden. AIM is half that: the entry level is £300,000, as is the fundraising amount. OFEX is even lower, with entry of £30,000 plus and £100,000 plus only for fundraising. If we are to address the issues raised in amendment No. 218 and provide more new build rented accommodation, particularly in locales in which it is required, the key thing is to consider the listing requirements as an encouragement to small REITs who understand and focus on their own locales where there is a particular shortage, requirement and demand.

Mark Francois: I understand that the hon. Gentleman intended to be here this morning for our debate but because of logistical difficulties beyond his control, he was not able to be. So, to save him time, I tell him that the Opposition returned to the issue of AIM-listing for many of the reasons that he elucidated. I said that we intended to return to the matter on Report. That being the case I hope that, for the reasons he outlined, we will have his support when we return to it.

Stewart Hosie: I thank the hon. Gentleman for understanding my logistical difficulties this morning. I will say no more about listing at the moment. I conclude by saying that the principle of the amendment—to deliver more new build rented accommodation—is a good one. If the Conservative party and others are prepared to return on Report with new ideas on how to facilitate that principle, I am sure that the Scottish National party will view those ideas positively.

Philip Dunne: I rise in support of the intent of the amendment moved by my right hon. Friend the Member for North-West Hampshire, which is to try to help the Government to achieve their objective. He has great experience in these matters.
I have tried to consider what was said at the time of the Budget when REITs were introduced into the Bill, so as to get guidance on the Government’s intent. Doing so was helpful, although the Budget is a challenging document to work through because it suffers from the lack of an index. If hon. Members turn to paragraph 3.117 on page 70 of “Budget 2006”, they will find a paragraph to which I have no doubt that the Economic Secretary had some input, perhaps by using the red editor’s pen. It says that
“the Government’s objective for the UK-REIT regime is to improve the efficiency of both the commercial and residential property investment markets”.
It goes on to talk about the desire to
“encourage increased institutional and professional investment to support the growth of new housing”.
It is specific and clear that a major plank of the intent behind REITs is to promote residential housing in this market. It has been encouraging to hear the level of consensus in the Committee about the need to promote additional housing in our economy.
The intent of my right hon. Friend’s amendment is widely recognised and I hope that the Economic Secretary will look favourably on its intent if not the amendment itself—I suspect that he will have difficulty in accepting it—so that on Report he may be prepared to introduce into this part of the Bill something that specifically encourages residential development and new build for REITs.

Edward Balls: The issues that were raised by the hon. Members for Birmingham, Yardley and for Ludlow (Mr. Dunne), and by the right hon. Member for North-West Hampshire, were debated this morning. In pointing to the beginning of the consultation, and given the things that have been said since, I hope that I have made it clear that the Government intend that the UK REIT regime should be supportive of both commercial and residential property. In that sense, we agree completely with the hon. Member for Ludlow, the right hon. Member for North-West Hampshire and Committee members from all parties. I hope that I made that clear this morning. I assure hon. Members who were not here, or were here but mentally elsewhere, that a reading of Hansard will make that clear.
The document that the hon. Member for Ludlow mentioned was drafted by Treasury Ministers and officials and, at the time, I was with him on the Back Benches, so I saw it for the first time when it appeared in the Vote Office. I fully support and understand the sentences it contains, which are consistent with the Government’s approach from the beginning.
I assure the right hon. Member for North-West Hampshire that the Government are supportive, in REITs and more broadly, of increasing the supply of residential housing to buy and to let—that is the thinking behind the Barker report—which is why we are seeking to implement the REIT proposals as we are doing. I do not anticipate a difficult weekend with the Minister for Housing and Planning.

John Hemming: Will the hon. Gentleman give way on the point of the amendment?

Edward Balls: I will come back to that in a moment. I assure the right hon. Member for North-West Hampshire that, in our domestic arrangements, we talk only about housing issues, at least when it comes to Finance Bills. Imagine what it must be like spending the weekend with Mrs. Gauke.

David Gauke: Let the record show that it is very pleasant.

Edward Balls: Pleasant, constructive and engaged. We have not yet had any detailed comments from the hon. Member for South-West Hertfordshire (Mr. Gauke), or from Mrs. Gauke, on the regulations that were posted last Thursday. If there are other opportunities in the debate to hear her views, we will obviously look forward to that.
Moving on to the amendment—

John Hemming: Moving on to the amendment, I shall try to be helpful and say that it seems to allow the Government, by order, to specify a zero percentage. If they wished not to constrain the situation, they could specify a zero percentage to start out with. If, at a later stage, they felt that it would be useful, they could make use of the amendment, without bringing in primary legislation.

Edward Balls: The hon. Gentleman intervened before I had started to talk about the amendment, following a speech in which he failed to refer to that point. However, I am keen to see that he is getting into the spirit of the Committee. I look forward to further amendments.
However, let me first give an answer to the right hon. Member for North-West Hampshire on his amendment. It would put a mechanism in place to make involvement in residential property an absolute requirement for becoming a UK REIT. I want to explain that I fully support his objective of encouraging further investment in residential property. As I said earlier, I look forward to, and would like to have, detailed discussions with him on those matters. However, starting to make more detailed, prescriptive—one could almost say, interventionist and regulatory—requirements on the marketplace is not the right road to go down..
I would also just say to the hon. Member for Braintree that the US regime, which he referred to a number of times today, has no requirement on the proportion of residential property. On the contrary, US REITs tend to specialise in particular types of property. Therefore, the US model does not have that kind of prescription.

Brooks Newmark: I absolutely agree with the point that the Economic Secretary is making. We were trying to reflect the intent of the Chancellor and the point that he made in his own Budget statement—to attract more capital into the house building market. All we are trying to do is stimulate the housing market in the UK, not replicate what goes on in the United States.

Edward Balls: If the hon. Gentleman would allow me to get to the point of replying, I would be able to respond to the amendment that we are debating.
On the more general point of encouraging more investment in the housing market, I have said repeatedly today that that is exactly what we want to do in the commercial and, in particular, the residential sector. I said earlier to my hon. Friend the Member for Wolverhampton, South-West that his concerns about pricing issues and REITs are not of major concern. The main issue in the housing market is restrictions on the supply of housing. I must say that the hon. Member for Braintree would have far more credibility in Committee and in lecturing us about the REITs regime in the context of the Barker review if he and his colleagues had supported the recommendations of that review. We have had either outright or de facto opposition consistently over the last two years. We saw it yesterday in Prime Minister’s Questions in which a senior Back-Bench Member got up and expressed hostility to the idea of more houses being built in his constituency. There are many Opposition Members who have consistently done that that and opposed the Barker review. Therefore, if the hon. Gentleman wants to encourage—

Mark Francois: Will the hon. Gentleman give way?

Edward Balls: No, I will finish the point. If the hon. Member for Braintree wants to encourage us to implement the Barker report, as opposed to the REITs part of the Barker report, I would be glad to be pressed by Opposition Members to do that. However, they have consistently been pressing us not to implement the Barker report. That leads to precisely the kind of social housing and residential housing problems and obstacles for first-time buyers that we see in Britain today. I will take the intervention from the hon. Member for Rayleigh, but it would be nice to have some clarity.

Mark Francois: We were having quite an interesting debate, which the Economic Secretary decided to make partisan. Let me respond in kind. Has he discussed the Barker review with the Secretary of State for Communities and Local Government who is arguably one of the biggest nimbys in the House of Commons?

Joe Benton: Order. We are drifting away slightly from the amendment. The Economic Secretary will reply and we will return to the amendment.

Edward Balls: I apologise, Mr. Benton. I have discussed the matter in detail with the Minister for Housing and Planning. She is fully supportive, as are we and all members of the Cabinet, of the implementation of the Barker report, including the requirements on REITs. If we had some clarity from Opposition Members—
Mr. Newmarkrose—

Edward Balls: I am not taking another intervention. If we had clarity from Opposition Members about their support for the Barker report in full, including REITs, they would have more credibility on those matters.
Mr. Newmarkrose—

Edward Balls: I am not taking another intervention.I want to get on, if that is okay with you,Mr. Benton—[Interruption.]

Joe Benton: Order. The Economic Secretary has clearly indicated that he is not giving way.

Edward Balls: I have no desire to conduct these proceedings in a partisan spirit, and certainly as regards Conservative Members. Any opportunity to join Conservative Members in attacking the Liberal Democrats seems to be totally appropriate, but I have no desire to move away from the good spirit in which we have conducted matters so far. I was moved almost to tears by the beauty of the burgeoning relationship that seemed to be occurring moments ago between the Scottish National party and the Conservative party. We look forward to seeing what other directions that might take in the coming months, starting on Report.

Stewart Hosie: Will the Economic Secretary give way?

Edward Balls: I should like, with your permission, Mr. Benton, to move on to the amendment, because that would be sensible. It would give HMRC regulatory powers to prescribe the proportion of property rental, which, as I said earlier, does not happen in the US system. The Treasury itself floated that idea as part of the first consultation back in 2004, which we published in the Budget document. We consulted and rejected that idea following a number of representations that argued that that would not be the right approach for implementing the Barker report proposals and, more broadly, our objectives for REITs and residential and commercial property sectors.
I shall explain why that is the case. If we were to go down the road of the amendment, we would force UK REITs to invest a minimum proportion of their assets, as stated in regulations, on residential property. That would have several unintended and potentially quite undesirable consequences. As noted earlier by my hon. Friend the Member for Wolverhampton, South-West, were the amendment used to lay regulations to prescribe a minimum condition, it would force companies that wanted to be UK REITs into certain investment decisions that might not be in the interest of them or their shareholders. Elsewhere in the world, REITs have tended to specialise in certain types of property such as residential property, shopping centres or other kinds of commercial property. As my hon. Friend said—I think that the hon. Member for Ludlow hinted at this as well—we fear that that route would be overly prescriptive and regulatory, and potentially lead to inefficient investment decisions.
The US REIT experience has tended towards specialisation—specialist residential REITs have been established focusing solely on specific property types such as city flats or student accommodation. We fear that forcing companies that specialise in commercial property to take on residential property simply to pass that test could lead to lower rather than higher standards of accommodation, and take away the market flexibility and efficiency that we have been trying to foster.
As I said, we consulted on that and decided not to go down that road. The decision not to go down that road on this particular and prescriptive amendment in no way weakens our intention to support residential as well as commercial property investment, not just in general, but in particular through the REIT regime. I said this morning to the hon. Member for Rayleigh—I say it again—that we will monitor that closely this year and into next year to keep it, and wider issues, under review.
This morning, we debated AIM. I shall not return to that other than to point out to the hon. Member for Braintree that the company, Grainger, to which he referred is in fact already listed on the full stock exchange. To link AIM to Grainger therefore seems somewhat odd. On that basis, we considered and rejected the amendment, and I urge the Committee to do the same.

Mark Francois: I shall comment briefly on the amendment. This morning, we had quite a detailed debate on the commercial versus residential balance of REITs, in the clause 104 stand part debate. I do not intend to reprise all of that now, but I think that my right hon. Friend the Member for North-West Hampshire has done us a service with this amendment. In a sense he has allowed us to have a second bite at the cherry on some of those points.
I can see exactly what my right hon. Friend is attempting to achieve here, and it is clear from our debate this morning that there is considerable concern throughout the Committee—it is not confined to any one party—about just how successful the new regime is likely to be in fostering investment, particularly institutional investment in residential property. However, the Economic Secretary has reiterated his commitment that the Government will keep the situation under review once the regime is launched and will monitor carefully whether it is proving successful for residential property, in light of Committee Members’ concerns.
Having received this morning the Government’s commitment to review, which the Minister has reiterated, I must say that although I can see what my right hon. Friend the Member for North-West Hampshire is trying to do, I am not automatically minded to support his amendment if it is pressed. Nevertheless, he has done us a service in giving us a second bite at the cherry, and I look forward to his decision.

George Young: I am grateful to the Economic Secretary for his response and to Committee colleagues from all parties for their speeches on my amendment. The position as I understand it is this: the Government have introduced a new vehicle that they hope will be invested in part in residential property. I tabled an amendment that seeks to deliver Government policy, and the Government have told me that it does not take the trick.
I accept the statement of the hon. Member for Wolverhampton, South-West that there is a powerful argument against obliging people to have a mixed REIT and I accept the argument about specialisation, but I am not quite as easily satisfied as my hon. Friend the Member for Rayleigh by what the Economic Secretary said.
Let us say for the sake of argument that in two years’ time, not a single penny has been invested in residential property through a REIT. What will the Government do? We heard from the Economic Secretary that he would keep the matter under review and be concerned if that happened, but we did not hear any undertaking about what he would do in order to achieve the objectives of Barker or to deliver the aspirations of the Chancellor’s Budget speech. I am slightly concerned that nothing would happen.
I am happy to give way to the Economic Secretary if he will take me a little bit further down the track on which he embarked this morning and this afternoon and give me some assurance that the vehicle will in fact generate some investment in residential property. Then I might consider withdrawing the amendment.

Edward Balls: I reiterate what I said this morning to the hon. Member for Rayleigh in particular. Over the course of this year and not just when the regime begins, we will be monitoring closely whether residential companies enter the regime. I explained that I was not surprised that early indications had come from the commercial sector, because of its larger scale and sophistication, but I also said that there had been private and public indications that residential property companies would come forward. I explained that the company referred to by the hon. Member for Braintree had a different business model entirely and would therefore never enter the regime. I will keep the matter under review this year.
I have asked the right hon. Member for North-West Hampshire for a meeting to discuss residential property investment more broadly, because I should like to learn from his expertise. It is not for me to pre-empt the review, but I assure him that we want to implement the Barker report on residential REITs as well as to support the commercial sector. In return, will he urge his colleagues to support the implementation of the Barker report? Conservative Members have not supported its implementation, and we have not seen the take-up of housing numbers that we would like. That is a fundamental problem. People say one thing when they come to the House to debate national policy and another thing when they return to their constituencies to discuss things with local councillors. Will he join me in urging Members from all parties to support the full implementation of the Barker report?

George Young: I am not sure to what extent you will allow me to respond to the planning issues,Mr. Benton, but I shall say this. I was the Minister for Housing and Planning, and I made endless speeches on both subjects. My views are on the record and remain unchanged.
The Economic Secretary leaves me in a dilemma. He and his hon. Friend the Member for Wolverhampton, South-West criticised the previous Administration for creating legislation to promote housing investment that made nothing happen. That was the HIP regime, to which they referred this morning. My concern is that the same thing might happen with residential REITs: that it is put on the statute book and there is no response. The Minister was helpful, and I am happy to have a meeting, but he did not say that he would then consider further fiscal initiatives in order to get the objective that Kate Barker wants if it has not been delivered by this specific piece of legislation. That was the undertaking—

Rob Marris: I quite understand where the right hon. Gentleman is coming from, and thank him for allowing me to intervene. He has been a Minister. Does he not recall that if he were in the situation of my hon. Friend, and said, “If we do not get any residential REITs within two years’ time, we’ll look at loosening the fiscal regime”, that would risk becoming a self-fulfilling prophecy? For example, people would hold back and stay out of the market for two years, in the hope of getting a better tax break in two years’ time.

George Young: I am not sure that that is a serious runner, because if someone put forward that argument, it would run the risk that nothing would happen, and they would forgo the opportunity. I suspect that there would be a dialogue, which would reveal the real reasons for that. I hope that the Minister is able to go just a little further, and say that he would be deeply disappointed if there were no investment in residential property through a REIT, and that he will reconsider the legislative framework with a view to seeing whether the desired objective could be produced. He did not go quite that far. He is nodding, which I hope means that he would be able to go a little further down the road. I would be happier with that than with the Government just expressing concern, and saying that they would keep it under review.
Mr. Newmarkrose—

George Young: I give way to my hon. Friend, who may have the magic words.

Brooks Newmark: The magic word could be (a). I should like to reflect on the point made by the hon. Member for Dundee, East. He made a slightly different point to that made this morning by my hon. Friend the Member for Rayleigh, which also reflected a point made by the hon. Member for Wolverhampton, South-West. It concerned the need for social housing, which the Conservative party supports. However, we in the south-east do not necessarily support the proposal to build houses throughout the south-east. Surely it would be good for the Minister to reflect on whether, if in a couple of years, there are no further residential REITs—

Joe Benton: Order. That is a very lengthy intervention.

George Young: I give way to the Economic Secretary.

Edward Balls: I heard the points that the right hon. Gentleman was making before he was intervened on by the hon. Member for Braintree. I said to him at a meeting that I was clear with the hon. Member for Rayleigh about our intentions in this area, how we will review the situation and what outcome we want to see. I cannot go further but I ask him to accept at face value the genuineness of my and our commitment in this area. I did ask him whether he could encourage Conservative Members to support the Barker review. It must start with the hon. Member for Braintree, and then build outwards. That intervention was a perfect example of the problems that we face in trying to get a consensus on a proper approach to housing in this country.

George Young: I give way again.

John Hemming: It is an important point—how do we actually get more housing for people where it is needed? One of the underlying difficulties comes from issues such as the availability of water. Those planning issues must be taken into account. In terms of the rainbow coalitions that exist across the country, there is actually a Lib Dem-Conservative progressive partnership in Birmingham, and Birmingham wants more houses built in it.

Joe Benton: Order. I must tell right hon. and hon. Members that interventions are becoming very lengthy, and are sometimes off the point.

George Young: The time has come to draw the debate to a conclusion. The Minister is a reasonable man, and he went as far as I suspect his brief allows him to go in giving the undertaking. Without prejudice to the possibility of bringing back on Report a related amendment, which tries to take all the tricks that have been mentioned in this debate, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mark Francois: It is a pleasure to follow my right hon. Friend the Member for North-West Hampshire after a very useful debate. The clause introduces the basic conditions for a tax-exempt property rental business within the REITs regime. I should like to raise with the Economic Secretary a concern that has arisen about the treatment of car parks associated with shopping centres operated by property companies. He is flicking furiously through his papers; I did give him brief prior notice that I intended to come on to this.
Essentially, condition 3 says that the property rental business must not involve property that would, in accordance with generally accepted accounting practice, be described as owner-occupied. No difficulty should arise if the property company leases a shopping centre car park to a third-party specialist car park operator, as the rent received should be included within the normal definition of property business income. The concern is that if the property company manages the car park itself, that could be treated as owner-occupation within the meaning of the clause. I raise this because I understand that there is an increasing trend for property companies to actively manage shopping centre car parks in-house, partly to ensure that customers arriving by car have safe, well maintained and attractive entry and exit points for their shopping trips.
The income from the use of property as a car park in that manner might fall outside the REITs regime. Not only does that seem to be illogical but it could impose a significant administrative burden on property companies that are obliged to carve out for tax purposes the income from car parks that are managed as an integral part of their overall property business in commercial terms. The British Property Federation commented on the point as follows:
“The legislation is unclear as to whether income from car parks associated with investment properties...is to be included within the tax exempt business. In France, legislation specifically includes such income, which is often a core feature of property investment because car parks are seen as an essential component of the attractiveness of the property.”
A second very specific point of concern arises from the treatment of property companies’ owner-occupied car parks. The precise terms of condition 3 could be taken to mean that because a company’s business includes an owner-occupied car park at a shopping centre, the entire property involved is tainted for REITs purposes, and cannot be included within the exempt pool of income. That would have the peculiar consequence that a company that outsources a car park to an external manager could enjoy REITs status for its rental income from the shopping centre, while a company that manages the car park itself could not benefit from the same treatment for all the other rental income from the property.
Martin Barber, the chief executive of Capital and Regional plc, wrote to HMRC on the point recently. I have met him and he has given me permission to quote from his letter for the purposes of this debate. He summarised the problem relating to in-house car park management as follows:
“From the advice that we have received this would not only disqualify the rent from being REITable but the building as a whole would be disqualified”.
He went on to say,
“I should mention that I understand in particular, relative to car parks in shopping centres, the French Government has recognised this and has specifically allowed the situation I describe.”
I suspect that that was not the Government's original intention, and the subject appears to have been partially addressed in the recent draft regulations that we all enjoyed reading. Specifically, the Real Estate Investment Trusts (Excluded Business) Regulations 2006 appear to deal with the second point by providing for the situation, in which case the car park would not taint the building for REITs purposes. So the regulations clarify that point.
However, the regulations still do not appear to address the first point, that the income from an actively managed car park would itself still be excluded from the tax-exempt business, in contrast to the French system. Can the Economic Secretary clarify whether that interpretation is correct? If it is, why is the car park income still to be excluded from the tax-exempt business, even if the building itself would no longer be tainted for REITs purposes?

Edward Balls: This clause is important, but I am happy to confine my remarks to car parks. The hon. Member for Rayleigh is quite right: when we spoke last week to confirm that the regulations were arriving, he told me that he intended to spend his weekend focusing on car parks. The hon. Member for Braintree does not want people to build houses in the south. I do not know whether he intends that they should live in car parks, but the car park issue raised by the hon. Member for Rayleigh is more specific. It goes to one of the important issues in the clauses, which is how we make a proper distinction between business that should be included within the tax exempt ring fence and businesses or services that should be excluded from it. That depends on whether it is income that should be qualifying because it comes under schedule A and therefore is a rent income, or whether it is really schedule D—trading income—in which case it is about the broader provision of services.
If a shopping centre provides a free car park for its customers, it would clearly be part of the provision of the shopping centre and would come squarely within the tax exempt regime. On the other hand, a car park that charged for parking, provided security for people’s cars and was not used simply by shoppers, but rented out a floor or two to local businesses would come squarely within schedule D and so would be required to be outside the ring fence. Clearly there will be borderline issues which will have to be dealt with.
We have had representations from Capital & Regional and others. I think that the guidance in part reflects those discussions. The hon. Member for Rayleigh is right that the regulations make it clear that that tainting fear will not arise. More broadly, I can assure him that before the autumn we will provide detailed guidance on the car park issue following consultation to make sure that all of the issues that might arise in getting that distinction between schedule A and schedule D have been picked up. The guidance will be as clear as possible.

Stewart Hosie: On that point, the Economic Secretary will be aware that there is a great deal of talk about the potential of taxing car parks as an environmental measure. He said that where a car park is currently provided free, it is clearly part of the operation and comes within the tax exempt regime. In the guidelines that he will introduce in the autumn will he consider what would happen where money had to be collected at a car park that was free in order to pay an environmental tax that was levied on an out-of-town car park in the way that he described?

Edward Balls: I understand the point that the hon. Gentleman is making, although I fear that he may be anticipating the proposals that we are told will be forthcoming from the Liberal Democrats in the coming weeks. Once we find out how they are going to tax big cars, the environment and capital gains to the tune of £12 billion, we will all have to reflect on the proposals. That may be one of the issues that we will have to consider with regard to the REIT regime. If such a proposal were made we would need to consider how it was to be incorporated. Given that, as of today, there is no such proposal on the table, it is not an issue that we need to deal with today.

Rob Marris: When my hon. Friend is issuing guidelines, will he do so on the railways, too, because Network Rail rents out railways?

Edward Balls: I will certainly look at that matter, but I suspect that it will come under schedule D rather than schedule A.
The rule is that 75 per cent. of the business of property companies must be within schedule A, tax exempt within a ring fence. There is nothing to stop a company that has a proportion of its income from car park services that come outside the ring fence from continuing to provide those services and charging for them. They will not receive favourable tax treatment but, as long as the 75 per cent. rule continues to apply, there will be no reason why they could not carry on that activity. I hope that I have clarified both points for the hon. Member for Rayleigh. If that is the case, hopefully we can proceed.

Mark Francois: I shall deal first with the Liberal Democrats. Having at least glanced at their proposals this morning, I look forward to seeing their detailed guidelines on the specific tax treatment of car parks in designated rural areas.

Dawn Primarolo: Which definition?

Mark Francois: There are definitional issues to be addressed.
Of the two issues that I raised, the Economic Secretary was fairly clear in dealing with the second point for which I am sure that Capital and Regional will be grateful.
As for the first point, we look forward to seeing the guidelines when they are published in the autumn. There was considerable uncertainty about the matter. The sooner the guidelines can be issued to clear it up, the better. However, the hon. Gentleman has given a fair reply and clause 107 should now be allowed to pass into law.

Question put and agreed to.

Clause 107 ordered to stand part of the Bill.

Clause 108

Conditions for balance of business

Question proposed, That the clause stand part of the Bill.

Mark Francois: I have one brief question for the Minister. Subsection (3)(c) states:
“where international accounting standards offer a choice of valuation between cost basis and fair value, fair value must be used”.
Why?

Edward Balls: The hon. Member for Rayleigh asks an interesting question and, in response, I shall give a brief introduction to the clause as I straddle my way.
The Government’s policy aim is to provide a regime whose main focus is property investment. The provisions ensure that the policy focuses particularly on the issue that the hon. Gentleman raised, which was written into the clause because the industry asked for it during the consultation period.

Question put and agreed to.

Clause 108 ordered to stand part of the Bill.

Clauses 109 and 110 ordered to stand part of the Bill.

Clause 111

Effects of entry

Mark Francois: I beg to move amendment No. 209, in page 100, line 39 [Vol I], at end add—
‘(8) Where assets involved in the property rental business are held as trading stock, any profit accruing by reason of this section shall not be a taxable profit.'.
We touched on this matter briefly when we debated schedule 16. The clause concerns the specific issue of double taxation in relation to properties that are held as trading stock. The background is that some property companies hold some of their properties on trading account as opposed to investment properties that are held on capital account in the usual way. To some extent, that is a historical distinction but it is still relevant for current taxation treatment. Primarily, however, it is a technical accounting distinction that mainly affects companies that specialise in residential property. We return, again, to the issue of what the regime does for residential property. I gently remind the Minister that that problem was one of the potential impediments to the growth of residential property REITs that I mentioned to him this morning. He said that he would deal with the issue in detail when we got to this point of our deliberations, and that is what I wish him to do.
The low rental yield on some residential properties means that the total commercial return necessarily includes the eventual gain on the sale of that property. In those circumstances, such properties are often categorised as being on trading account even though they are occupied by someone who is paying rent and they may be held for many years prior to their eventual sale. The existing tax consequence of that categorisation is that the profit that arises when the property is sold may be taxed as a simple trading profit rather than as a capital gain. As we are talking about a capital gain, I am sure that the Liberal Democrats are paying particular attention.
Under clause 111(2),
“Assets...involved in property rental business...shall be treated for the purposes of corporation tax as being sold...immediately before entry”—
to the REIT regime—
“and re-acquired...immediately after entry.”
The deemed sale and reacquisition is treated as being at market value. If the clause stopped there, it would mean that all property assets entering into the REIT regime would be subject to tax on the inherent taxable gain compared with their original cost. However, subsection (7) states clearly that
“A gain accruing by reason of this section shall not be a chargeable gain.”
A problem arises, because the deemed profit on properties that are held as trading stock does not enjoy equivalent treatment. Therefore, such properties will be subject to corporation tax on notional profits above their purchase price on entry plus the 2 per cent. entry charge stipulated in clause 112. In other words, the measure potentially represents double taxation on the properties in question.
Our proposed amendment remedies the situation by providing that the notional profit of stock held on trading account is not taxable other than for the 2 per cent. entry charge that would apply to the other properties entering the regime in the normal way. Unless that is done, the burden of potential double taxation will particularly affect companies in the residential sector to the point where it could make it difficult for such companies to contemplate converting to REIT status.
The Government have attempted to address the issue via draft regulations—the Real Estate Investment Trusts (Excluded Business) Regulations 2006, which seek to address the problem by amending schedule 16 along the lines that the Economic Secretary outlined a few minutes ago. My understanding is that the instrument effectively excludes all trading property from the REIT regime. That prevents the possibility of double taxation, but it gives rise to many more questions about the applicability of the REIT regime to residential property companies because the regulations say that such properties may not enter into the regime at all.
The British Property Federation has obviously also been doing some reading during the weekend. In response to the draft regulations, it argued as follows:
“This would appear to be a stop-gap measure to address the specific concern with regard to double taxation but it does raise a number of questions as to how the regime will apply to companies considering conversion to REIT status but who hold these types of properties in practice.”
The BPF goes on to say:
“In summary, the amendment”—
in other words, the regulations—
“proposed by the Government does remove the double charge but it presents a significant element of uncertainty for these types of assets.”
In fairness, the Government appear to have acknowledged that there is a genuine issue. However, their proposed remedy seems unnecessarily complicated. Given all that, and as there is no Government amendment on the point, though there are regulations, we believe that it would be better to put a solution in the Bill, which is what our amendment is designed to do.
So, given all the issues highlighted in the debate on clause 104 stand part about the balance of commercial versus residential property, I ask the Minister to consider accepting our amendment in order to clarify the situation without the need for additional regulations on this specific point.

Edward Balls: We have been debating the nature of the exemptions from tax that the Government are tryingto put in place and the conditions that go alongside that—the 90 per cent. distribution rule, the 75 percent. business rule, the 2 per cent. entry charge and the 1.5 per cent. interest cover charge.
A moment ago, in the context of car parking, we discussed how, in particular, the 75 per cent. rule will apply in an activity that potentially crosses the dividing line between schedule A activity and schedule D trading activity. That is at the heart of the measure.
As I said this morning and as the hon. Member for Rayleigh (Mr. Francois) acknowledges, we have received representations that rightly pointed out that where property is held as trading stock, the proposal as drafted would have had the effect of charging companies twice on entry to the regime, which was not our intention. Last week, we published regulations to make it clear that trading stock falls outside the tax-exempt ring fence, which means that there is no deemed sale repurchase for properties that are trading stock, thus no profit will arise on them on entry, neither will there be an entry charge. The double charge will not arise.
We produced the regulations last week in order to inform these debates, although the regulations themselves do not need to be finalised until the autumn. They are draft regulations for consultation with the industry to ensure that we get them right. This is not the last word on the regulations; that is the purpose of publishing them for consultation.
Amendment No. 209 is designed to deal with the matter in the Bill rather than in regulation, but our fear is that it would not achieve its intended purpose. It is designed to extend to trading property the same treatment that applies to investment property at the point of joining the regime. When investment property is transferred to the tax-exempt business on entry to the regime under clause 111 there is a deemed sale and reacquisition at market value. Any increase over cost would normally fall to be taxed under the rules that apply to capital gains and under clause 111(7) that gain is ignored for tax purposes. Instead, a 2 per cent. entry charge is payable based on the market value of the property. The amendment would replicate that for trading stock by providing that any profit on the deemed disposal of trading stock is not taxable. However, it does not provide parallel treatment because it overlooks the difference between the workings of the capital gains tax rules and the rules for taxing trade and profits that would apply to trading stock.
The difference is that for capital gains purposes, providing that a gain is not taxable automatically means that a loss in similar circumstances is not relievable. For trading stock there is no automatic prevention of tax relief for any losses. As drafted, the amendment would open up the possibility of relief for losses where the profit in the same circumstances is tax exempt. That undermines one of the key principles of the tax-exempt ring fence and would expose the Exchequer to loss of tax should companies try to manipulate their portfolios to crystallise losses on trading stock.
For that reason, we do not believe that taking the route proposed by the amendment is the right way to deal with the issue. It would potentially undermine the tax-exempt ring fence and add a substantial extra cost to the taxpayer. Our preferred option is to ask the Committee to reject the amendment in the knowledge that we will consult in detail on the draft regulations to ensure that the final regulations do not cause any undue problems for those concerned.

Mark Francois: I am grateful to the Economic Secretary for stressing that the regulations are in draft form. The final regulations will presumably be dealt with by statutory instrument sometime this autumn. I have a funny feeling that he and I will end up debating the final version.
I tabled this probing amendment to tease out the Government’s thinking and the Economic Secretary has given me some justification for amending schedule 16 by regulation. Given that consultation is now under way, I am grateful that he has acknowledged that there is a genuine issue to be addressed, even if we do not entirely agree on the solution. It is a problem that has to be overcome somehow. If it is accepted that residential REITs should be fostered in the UK I am not convinced that the Government’s solution of just automatically excluding such properties from the regime will necessarily be the right answer.
I put down that marker with respect to the consultation that will now take place and I do not entirely concede the point made by the Economic Secretary. However, given that the Opposition have raised the issue, that a consultation is under way, and that the Economic Secretary has realised that something needs to be done, it is sensible to withdraw the amendment and pursue matters in the context of the consultation. Hopefully we can all come up with a solution in the autumn. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 111 ordered to stand part of the Bill.

Clause 112

Entry Charge

Question proposed, That the clause stand part of the Bill.

George Young: The importance of the clause is that it sets out the entry charge—the membership fee—that a company will have to pay to become a REIT. It would be helpful if the Minister explained the logic of the 2 per cent. entry charge that is set out in the clause, because that was not something on which there was consultation—the Government took the view that it was a tax measure and therefore something that was announced in the Budget.
No one who has ever negotiated with the Treasury or with the Customs and Excise—HMRC as it is now known—would argue that either of them is a soft touch. There was some surprise, however, when the2 per cent. rate was announced in the Budget. I am not a regular reader of The Tax Journal, but an article in the 3 April edition said:
“The entry charge will be based on 2 per cent. of the gross asset value of properties going into the regime. This is at the lower end of many estimates”.
Since the article was published, British Land has announced that it will convert to a REIT. The business pages of The Times reported on what the company had said as follows:
“The group said that it expected a one-off conversion charge of £287 million to convert to a Reit, but the new structure would, in effect, wipe out £1.3 billion in contingent capital gains tax.”
It would be quite helpful, against the background of that equation, if the Minister would set out how the Government arrived at the 2 per cent. rate, and if he could satisfy us that it represents a fair deal between the taxpayer on the one hand and the company on the other, because when a business becomes a REIT it enters a more benign tax regime and does not pay capital gains tax on future property disposal.
At one point in time there was a contingent liability of £1.3 billion for British Land, and that might have continued to grow if property values increased, but it will be extinguished by a one-off conversion charge of £287 million. It would be interesting to know the discount rate that the Treasury used in order to arrive at the 2 per cent. figure.
Clause 112(3) contains a rather complicated equation. The explanatory notes state:
“This amount is 2 per cent. of the aggregate market value of properties that are transferred...divided by the rate of tax applicable to the company’s profits.”
Will the Minister explain that? If, at a certain point in time, the company is not paying any tax on its profits—perhaps because it is not making any—would it follow that there would be no entry fee, or is it impossible to become a REIT without some sort of membership fee being paid?
The Committee should not let the clause through on the nod, because substantial sums are at stake and it is the first time that the 2 per cent. charge has been debated.

Julia Goldsworthy: I am pleased that there is so much interest from the Conservative Benches in relation to the Liberal Democrats’ tax proposals. Although this is clearly not the right place for it to happen, I wait with interest to see whether there will be any further detail from the Conservatives on their tax policies.
I have two brief questions on the clause to ask the Economic Secretary. The first follows on from what the right hon. Member for North-West Hampshire has just said. I understand that the justification for the entry charge is to ensure that the regime is of no overall cost to the Exchequer. I see from the Red Book, in one of the appendices, that in the first three years the introduction of the new regime will bring revenue into the Exchequer. I am interested to know what the long-term projections are. As the right hon. Gentleman said, businesses are leaping to convert to the trust system because it represents a long-term tax benefit to them. What assessment has the Treasury made of that matter?
Secondly, I have a question about clause 112(5), on the instalments that REITs may elect to use to pay the entry charge upon conversion. What will happen if a newly established REIT breaches one of its conditions in the first four years, before it has paid all its instalments? Will the remaining instalments fall or will the REIT still be liable for its 2 per cent. entry charge even though it has fallen out of the system?

Edward Balls: The Government were clear from the beginning of the consultation process in 2004 that a key objective of the introduction of REITs was that it should not involve a cost or a loss of tax to the Exchequer. As the right hon. Member for North-West Hampshire made clear, that important consideration has led us down the route of introducing the conversion charge. While it is true that the numbers chosen were not consulted on, the overall concept of a conversion charge was always a clear part of the regime.
The entry charge will be payable when a company elects to join the regime or when a subsidiary company is acquired by an existing REIT. It will be 2 per cent. of the market value of the properties transferred to the tax-exempt property rental business of a UK REIT. A company may not set any losses against that amount. It can choose to pay the full amount of tax as part of its normal corporation tax payment in the first accounting period in which it is in the regime, or it can spread it over four years. The clause provides the Treasury with the regulatory power to change the amounts of the instalments, but only as a result of changes in interest rates.
I shall answer some of the points raised by hon. Members. The right hon. Member for North-West Hampshire asked about the rate of the interest used to calculate the conversion charge. It is equivalent to the Government’s nominal discount rate—a real discount rate of 3.5 per cent, adjusted by the retail prices index. The right hon. Gentleman also asked why we came to the figure of 2 per cent. Our judgment was that that was the right figure to ensure, over a period of years, that it would cause neither a net cost nor a net revenue rise to the Exchequer. If we had gone above 2 per cent. it would have had a deleterious effect on the number of companies choosing to move into the REITs regime.
During our important debates on these clauses, the hon. Member for Braintree has voiced his concern that companies will not want to join the REITs regime, whereas the hon. Member for Falmouth and Camborne (Julia Goldsworthy) has talked about companies flocking into it. She is right: a number of companies have indicated that they will join, precisely because the consultation allowed us to get the numbers right. I am therefore confident that the regime will be successful.
The right hon. Member for North-West Hampshire asked whether the regime will lead to substantial windfall gains for certain companies. I say to him that one must always take with a pinch of salt the numbers that one reads in the press about potential liability. When one is considering introducing a new measure that will raise revenue, the numbers that appear in the press are often substantially higher than those that turn out to be correct.
One only has to remember thatÂ a few days ago we were debating clauses on the insurance industry. Back in the autumn companies feared that the cost of introducing those clauses could run into the £1 billion to £1.5 billion range. Actually, the numbers are closer to £100 million. Exactly the same thing applies here.

Mark Hoban: You changed the rules.

Edward Balls: We did not change the rules; we clarified them to ensure that they were clear. The same thing arises in terms of the right hon. Member for North-West Hampshire—

George Young: Will the Economic Secretary give way?

Edward Balls: I shall answer the right hon. Gentleman’s point; then he can tell me why he disagrees.
In this case, we have introduced a regime that will be beneficial to some companies that have a greater deal of potential capital gains in their portfolios, therefore, ex post, as opposed to ex ante, it is not surprising that stories appear in the press to the extent that their gains will be substantial. On the basis of our investigations, before the announcement in the Budget and afterwards, the capital gains liabilities reported in the media do not provide an accurate picture of the actual tax that would have been paid by companies if they sold their properties. Also, many property companies have losses available that would offset any charge on capital gains on conversion to UK REITs status. Our judgment, before the Budget announcement and today, is that this will still be a revenue-neutral—[Interruption.]
I am explaining to the hon. Member for Falmouth and Camborne that in the Budget documentation we show that, in the early years, the impact of introducing UK REITs would give a net yield to the Exchequer of £35 million, then £155 million and then £130 million. However, it is a standard practice, as she will know, to publish the net effect of a measure. The figures I have mentioned show the net impact of a reduction of taxes at the corporate level, with increases in tax at the investment level, including the entry charge. However, in the later years there is a cost to the Exchequer of the introduction of the conversion charge: over the period it ends up netting out. We are confident that the measure will be introduced, as we always intended, without an overall gain or loss to the Exchequer.

George Young: In which case, given the problems facing the Treasury, bringing forward tax revenues may not be wholly disadvantageous. The point that I wanted to make was this: is the Economic Secretary saying that the figures given by the chairman of British Land after the Budget, at the company’s annual general meeting, did not accurately recognise the entry charge and the potential capital gains tax forgone? Surely, he is not saying that the figures are wrong.

Edward Balls: The right hon. Gentleman, who has experience in these matters and has spent considerable time on the Government Benches in Committee, will know that that is exactly what I was not saying. It would be wrong for me or anybody to comment on the tax or other affairs of any individual or company. The only point that I was making is that the general reports that one has seen in the press about the potential scale of gains to companies because of the introduction of the conversion charge at this level are not, in our view, fully accurate. In fact, we will be introducing the conversion charge in a way that is revenue-neutral to the Exchequer over a period of years.
The right hon. Gentleman’s underlying point is right; by introducing this regime, we are substantially improving the tax position of companies that invest in the commercial and residential property market for rent. We are removing a situation in which, before the introduction of the REITs regime, a higher rate taxpayer would be paying 47.5 per cent. tax for indirect investment; that would be reduced to 40 per cent., because of the UK REIT. Similarly, a pension fund would be paying 30 per cent. on indirect investment, but that would be reduced to 0 per cent. as a result of the REIT. The right hon. Gentleman is right. However, we are reducing a substantial incentive for investors who are currently tax advantaged to invest directly to be able to invest indirectly through a REIT regime. Property companies that are going to transfer into the REIT regime will do so and get a substantial ongoing benefit because of those changes to the tax regime and the tax-exempt ring fence. The right thing to do is to ensure that that does not happen at the expense of the taxpayer, hence the 2 per cent. conversion charge, which we are confident has been introduced at the right level, as I said. On that basis, I commend the clause to the Committee.

Mark Francois: I wish to make one brief, technical point on clause 112. Subsection (7) states:
“The Treasury may by regulations amend a percentage specified in subsection (5) in order to reflect a change in interest rates”.
That is a permissive power to be exercised by regulation. For the avoidance of doubt, will the Minister confirm that that works both up and down, and that if interest rates were to fall, theoretically, the regulations could reduce the charge, as well as increase them if interest rates were to rise?

Edward Balls: It is for others to interpret that clause, but I take it at face value. The Government intend the 2 per cent. conversion charge to deliver a revenue-neutral situation for the Exchequer. As I have said, that will be reflected in the way in which the system operates, and therefore there is no intended symmetry. I hope that that provides reassurance.

Question put and agreed to.

Clause 112 ordered to stand part of the Bill.

Clause 113

Ring-fencing of tax-exempt business

Question proposed, That the clause stand part of the Bill.

Julia Goldsworthy: I have a brief query. The clause deals with ring-fencing and the definition of tax-exempt and tax-liable businesses at the time that a company converts to REIT status. What happens if a lease is signed before conversion to REIT status, and after that when rent continues to be paid under REIT status? Is that tax liable under the previous regime or the REIT tax regime?

Edward Balls: I am happy to answer that question. I think that the Liberal Democrats will have to focus their interests increasingly on the tax-exempt regime because they would find companies increasingly attracted to tax exemptions were we to go down the road that they seem to be proposing. As I understand it—the detail has yet to be put before us—the proposals are for substantial tax increases on businesses, and particularly on entrepreneurs, including in the property sector. So I understand her concern about the clause, and I hope that I can give her some reassurance to pass on, although I fear that once businesses read the details of her and her colleagues’ proposals, they will find it scant reassurance.
The hon. Lady asked whether clause 113(3)(e) means that rents accruing under leases entered into prior to the UK REIT regime are not tax-exempt. The answer to that question is, “No, it does not mean that”. The reference to income relating to pre-UK REIT businesses deals with unusual circumstances. For example, it would exclude tax-exempt business damages awarded by a court to a company after it entered a regime when the damages relate to an incident that happened before that company entered the regime. I think that I can reassure her on that particular point.

Question put and agreed to.

Clause 113 ordered to stand part of the Bill.

Clause 114

Maximum shareholding

Question proposed, That the clause stand part of the Bill.

Mark Francois: The clause deals with maximum shareholding and provides for the Treasury to make regulations to deal with a company in which a shareholder owns more than 10 per cent. of the shares. Originally, the Government intended to impose a limit on shareholdings of 10 per cent. which effectively could not be breached. That would have been one of the hard conditions of the regime. However, following consultation and representations from the industry, a somewhat lighter touch is now to be applied in such instances.
The Bill states that the Treasury will provide regulations outlining the tax consequences of dividends above the 10 per cent. threshold. Those are now contained in the Real Estate Investment Trusts (Breach of Condition) Regulations 2006, which the Committee will have had an opportunity to peruse in detail, and which I read last weekend.
In essence, the regulations stipulate that the excess dividend above the 10 per cent. threshold will be subject to tax according to the following formula, where
“DO is the total amount of the profits of C (tax exempt) distributed by the company in respect of ordinary shares to which the recipient was beneficially entitled;

SO is whichever is the greater percentage of—
(a) the ordinary share capital held by the recipient; or
(b) voting rights controlled by the recipient;
in the company that gave rise to the distribution;

DP is the total amount of income distributed by the company in respect of preference shares;

SP is the total percentage of preference share capital held by any recipient;

BRT is the basic rate of tax in force at the time the company distributed the income...
(4) The rate of tax applicable to the sum is MCT.”
The amount of tax will be calculated as follows:

Rob Marris: That is straightforward.

Mark Francois: As the hon. Gentleman says from a sedentary position, it is reasonably straightforward. I concur, but to prove that I have taken the trouble to read the regulation and the formula, will the Economic Secretary take the Committee through how it will work in practice?

Julia Goldsworthy: I have one question on clause 114, which deals with maximum shareholding. The REIT can be required to monitor that maximum shareholding is not breached, but it cannot prevent such breaches from taking place because it cannot control the behaviour of its shareholders. Are REITs liable for tax penalties if they breach the maximum shareholding condition, or do they just need to make sure that they do not make distributions to shareholders who breach the shareholding limit?

Edward Balls: I am grateful to the hon. Member for Rayleigh for showing me that he studied the regulations. I could walk him through the formula in detail. [Interruption.] I could, actually, which is what should worry hon. Members, but I fear that it would run the risk of becoming a post-neo-classical endogenous growth theory moment, and we have had one of those.
I assure the hon. Gentleman that the formula has been carefully drawn up in consultation with the industry precisely to achieve the intention he mentioned, which is to give us a bit more flexibility. As he knows, a great deal of time was spent on consultations in 2004-05 partly to find a way to introduce a UK REIT without causing substantial losses of tax, particularly because of the operation of international tax treaties. The 10 per cent. shareholding limit was necessary to achieve that aim, but the industry was concerned that a rigid approach to it would be difficult to deliver and monitor.
Therefore, through the consultation, we have come up with a solution that achieves Government objectives but gives us more flexibility at the same time. I do not know whether the hon. Member for Rayleigh brought his copy of the regulations with him, but to provide some clarity for the Hansard reporter, who clearly did not follow him as he read it out, I shall pass him a copy.

Mark Francois: May I confirm for the record that I most definitely brought my copy of the regulations with me? If the hon. Gentleman thinks that I can carry around a formula like that in my head, he flatters me a bit too much.

Edward Balls: In that case, maybe I could have mine back.
I read out a quote this morning from the British Property Federation that commented on how we have listened to the property industry’s views and concerns. That is a good example of the Government listening and presenting a solution— although the formula that the hon. Member for Rayleigh read out sounded complicated—that is designed to create flexibility and to avoid an overly heavy-handed and regulatory approach to delivery. He may intervene to confirm that. However, he probably favours the formula rather than opposes it. An intervention confirming that he supports the regulation would be welcome.

Mark Francois: The Economic Secretary is right that the Government consulted with the industry. What I am prepared to say is that we favour, in principle, that that is no longer a hard requirement and that the Government have introduced flexibility into the system in the treatment of the dividends. Therefore, if the original position was that the 10 per cent. limit was absolute and the new position is that one can, in certain circumstances, go beyond 10 per cent. subject to a tax charge, that is better than the original hard 10 per cent. limit. That I am prepared to confirm to the Minister.

Edward Balls: I am grateful to the hon. Member for Rayleigh. We can both agree that a long equation can sometimes be helpful in providing flexibility and a solution to a problem. It shows why the consultation was successful and also that the Government were sensible to provide draft regulations to inform the debate.
To provide some reassurance to the hon. Member for Falmouth and Camborne, she asked whether the tax charge applies only when the distribution is made rather than when there is an excess shareholder. The answer to that is yes. It applies only if the dividend is paid to the excess shareholder. I hope that gives her some reassurance. On that basis, I hope we can proceed.

David Gauke: I made the comment to the Economic Secretary about the reason for the 10 per cent. because of the potential risk of loss of revenue due to overseas unit holders being able to claim the benefit of double taxation treaties. If it were not for that, and I donot know if the Economic Secretary would agree, the10 per cent. rule would be undesirable. The Royal Institution of Chartered Surveyors has said that it may limit the number of companies that will be likely to convert to a REIT at the outset and will subsequently constrain the creation of new REITs through spin-offs, demergers and so on.
Looking at an international comparison of REITs or equivalent vehicles—Australia does not have a maximum percentage, Canada does not have a maximum, and nor does the US. One can quote other countries. Is the Treasury engaged in any negotiation on amending those international taxation treaties so that it is no longer necessary to have the 10 per cent.? If so, what progress has been made?

Edward Balls: We could have decided to attempt to renegotiate the series of tax treaties that we have with other countries. Alternatively we could have decided to consult with the industry to ensure that the 10 per cent. rule works in a flexible, rather than a rigid, way. A number of large companies are saying that they are going to move over to the UK REIT. That shows that the 10 per cent. rule will not be the obstacle that the hon. Gentleman fears.
The answer to his question is that we have not sought to renegotiate tax treaties. We have instead sought to re-introduce a flexible solution to the issue. If we had not done that, the introduction of a UK REIT would have been held up for some time.

David Gauke: To avoid doubt, I am not critical about the introduction of the 10 per cent. rule. It seems the quickest way in which we could have progressed. However, given that we have done that and bought some time, is it not possible to, at the same time, look again at those international taxation treaties to see what, in the fullness of time, may be a disadvantage. However, I accept the point that time will tell on that.

Edward Balls: I can provide reassurance on that point. All the time, we are considering tax treaties and renegotiating them, and my experience has been that the process can take considerable time. If a tax treaty is renegotiated, many issues need to be considered. As we move forward and renegotiate tax treaties in future, we will ensure that the UK REIT issue is fully factored into them. However, we shall not seek to renegotiate all the tax treaties for that purpose, and we shall certainly not renegotiate all of them before we introduce a REIT regime—that is why we have gone for the 10 per cent. rule. We shall factor the REIT regime into future discussions.

Question put and agreed to.

Clause 114 ordered to stand part of the Bill.

Clause 115 ordered to stand part of the Bill.

Clause 116

Minor or inadvertent breach

Edward Balls: I beg to move amendment No. 168, in page 103, line 28 [Vol I], after ‘section', insert ‘106(5) or (6),'.

Joe Benton: With this it will be convenient to discuss Government amendments Nos. 169, 146, 152 and 153.

Edward Balls: Clause 116, which contains the key conditions for companies wishing to join and remain in the UK REIT regime, has already been debated in the Committee of the whole House. As discussed during that debate, those conditions are key to the regime and of a type generally within the control of the company. On that basis, a breach of one of those conditions will result in removal from the regime, with effect from the end of the previous accounting period.
However, following discussion with industry representatives, it has come to the Government’s attention that in some circumstances companies might breach conditions 3 and 4 through no fault of their own. Those conditions relate to being listed on a recognised stock exchange and not being a close company. It has been argued, and the Government have been persuaded, that a company could become close without being aware of the fact, due to the actions of shareholders.
It has also been argued that during a takeover, a company in the process of being absorbed by another UK REIT, which was itself listed, might be delisted from a stock exchange. It might also fail the close company test at some point. In that case, the company being taken over would lose its UK REIT status under the current rules with effect from the end of the previous accounting period. In addition, the company carrying out the takeover would be forced to pay an entry charge on the assets of the target company—assets that would have already been subject to an entry charge at an earlier date.
Both situations would be unfair to the participating companies, so it is proposed that instead of such companies being ejected automatically from the regime, the conditions be added to clause 116, which subjects such companies to the minor breach conditions in the same way as clauses 107 and 108.
The amendments to clause 130 are connected to those to clause 116. The latter add the listing and close company conditions to a list of minor breaches of the regime’s conditions; the former stop breaches of those two conditions from resulting in automatic rejection from the regime. Mr. Benton, I ask you to note that there are connected amendments to schedule 17, which will be discussed in due course; they are also in the spirit of those changes and clarifications.
In respect of what the hon. Member for Rayleigh said earlier, as the amendments respond to particular industry concerns I hope that they can be welcomed by the Committee. I commend them all.

Mark Francois: To respond directly to the Economic Secretary’s last comment, we indeed welcome the amendments to clause 116, which are grouped with the sensible contingent amendments to clause 130, which we also welcome. I welcome them not least because we called for something similar in the Committee of the whole House debate on 3 May. We gratefully welcome the Minister’s acceptance of a good idea.
The key point is that the conditions of clause 106 are such that any breach could result in the automatic disqualification of the company concerned from the REITs regime. As I put it at the time, that represents a sending-off offence rather than a booking, as applies to some other conditions in the Bill, which are covered by the minor or inadvertent breach procedure in clause 116 and which are further fleshed out by the draft Real Estate Investment Trusts (Breach of Condition) Regulations 2006.
The Government amendments seek to apply the minor or inadvertent breach procedure for two of the clause 106 conditions: condition 3, the recognised stock exchange listing requirement, and condition 4, the restriction on REITs being close companies—that is, those controlled by five or fewer shareholders. As I asked at the time, with reference to clause 106, why, in principle, should a company be forced out of the REIT regime because it is controlled by five or fewer people? It would be interesting to hear the Government’s thinking. For instance, a company that breached the condition would automatically be removed from the regime. Companies might therefore be required to monitor their shareholdings continuously, to ensure that the condition was not breached.
Because the actions are to some extent, however, outside the company’s control, the management might not be able to anticipate, or even prevent, such a breach, even though, were it to occur, it might cost them their REIT status, and, in some circumstances, might not be their fault. The Government amendments appear to recognise that potential unfairness, and, although they do not remove the two conditions, they have in effect introduced some tolerance of minor or inadvertent breaches. They have made them yellow card rather than red card offences. That is judicious of the Government and we therefore welcome the amendments.

Julia Goldsworthy: I want briefly to say that I too welcome the amendments. The provisions deal with inadvertent breaches, which may be beyond the control of the real estate investment trust. Allowing such breaches to cause them to lose their status would, in turn, make the REIT system a less attractive and more unstable option for investment; the amendments would give greater certainty.

Edward Balls: As the hon. Member for Rayleigh said, the amendments have reduced breaches from red card to yellow card status, and on that basis I commend them to the Committee.

Amendment agreed to.

Amendments made: No. 169, in page 103, line 32 [Vol I], after ‘section', insert ‘106(5) or (6),'.
No. 146, in page 103, line 34 [Vol I], at end insert—
‘(a) provide for this Part to cease to apply to a company at a time specified by or determined in accordance with the regulations (which may be before the breach of a requirement);
(b) provide for this Part to continue to apply to a company with specified modifications;'.—[Ed Balls.]

Clause 116, as amended, ordered to stand part of the Bill.

Clauses 117 to 120 ordered to stand part of the Bill.

Clause 121

Distributions: liability to tax

Amendment proposed: No. 147, in page 106, line 26 [Vol I], after ‘company', insert
‘within the charge to corporation tax'.—[Ed Balls.]

Joe Benton: With this it will be convenient to discuss Government amendments Nos. 148 and 149.

Mark Francois: It is our understanding that the amendments are effectively tidying and drafting provisions, with no major consequences for the operation of the regime. On that basis we are happy to accept them.

Amendment agreed to.

Amendments made: No. 148, in page 106, line 28 [Vol I], leave out ‘not a company' and insert
‘a person other than a company within the charge to corporation tax'.
No. 149, in page 107, line 7 [Vol I], leave out ‘Section 231 of ICTA' and insert
‘Sections 231 of ICTA and 397 of ITTOIA 2005'.—[Ed Balls.]

Clause 121, as amended, ordered to stand part of the Bill.

Clauses 122 to 124 ordered to stand part of the Bill.

Clause 125

Movement of assets out of ring-fence

Edward Balls: I beg to move amendment No. 150, page 110, line 5 [Vol I], leave out ‘earlier' and insert ‘later'.

Joe Benton: With this it will be convenient to discuss the following amendments: No. 210, page 110, line 7 [Vol I], at end insert—
‘(7A) For the purposes of this section completion of development shall be taken to occur on practical completion of the main contract for the relevant building works.'.
No. 211, page 110, line 7 [Vol I], at end insert—
‘(7B) For the purposes of subparagraph 7(b) of this section, each development of property shall be assessed separately to establish if the costs exceed 30 per cent of the fair value of the property.'.
No. 212, page 110, line 7 [Vol I], at end insert—
‘(7C) Where a property acquired by a company to which this Part applies is developed and held for three years before disposal, the asset shall be treated as being disposed of in the course of the business of C (tax exempt).'.

Edward Balls: Amendment No. 150 seeks to amend a minor drafting error, and I shall then turn to amendments Nos. 210 to 212, which would make changes to the part of the clause that introduces a development test into the regime. All the amendments relate to the same part of the clause, so it might be useful if I first explain how the development test works and what its purpose is.
As I stated at the outset of the debate on part 4of the Bill, the Government’s aim is to correct inefficiencies in the property rental market by equalising the tax treatment between direct and indirect investment in property. Because there are no such inefficiencies in the property development market, the Government do not intend to give a tax exemption to corporate income derived from developing property for sale. The test contained in the legislation seeks to establish rules for what happens when a company develops property, rents it out for a short time and then sells it.
Although case law on what amounts to a trading profit is well established, its application can lead to prolonged discussion with the Revenue. To avoid that discussion and provide certainty, if a rental asset is developed and sold within three years of completion, the gain on sale is worked out on the basis that the property was never within the ring fence.
Development for the purpose of this test means that more than 30 per cent. of the value of the asset when it entered the regime has been spent on further development. The test does not automatically mean that the gain will be taxed as a trading gain, only that it will fall outside the ring fence, where the normal case law rules will apply to determine whether it is a trading profit or a capital gain. However, the Government appreciate that treatment of the disposal as being part of the taxable business is inconsistent with having collected an entry charge on the asset. The clause therefore provides a mechanism for a refund of part of the entry charge in such circumstances.
During consultation, concern was raised about the existence of the development test and some commentators felt that the existing case law would be sufficient. For those who do not know the details of the existing case law—I am sure that my hon. Friend the Member for Wolverhampton, South-West does—

Rob Marris: Remind me.

Edward Balls: These are called the indicia of trade, or badges of trade, and date back to the 1820s. A number of indicators can be used in deciding whether to count a capital gain as a trading capital gain for these purposes.
It is, however, important to remember that the tax-exempt environment offers a far greater incentive for a company to try to manipulate the factual evidence to ensure that a tax exemption is obtained. In practice, the discussions about what constitutes a trading profit are often protracted. This test simply acts to add certainty, and tax profits on disposal in the same way as would have been the case had the company not been a UK REIT. The profits may be taxable either as trading profits or as a chargeable gain depending on the facts. There is no element of penalty.
Let me turn to the Government amendment. As originally drafted, the clause established as the base cost for determining the value of any development the earlier of the date of entry of the property into the regime or the purchase of the property. Responding to concerns expressed by the industry during the consultation period, the amendment would change that to the later of the two dates, as it would clearly be wrong to use as a base cost the value of the property when it was purchased should that purchase have happened before the company entered the regime. That is in line with the Government’s intentions in this area.
Three Opposition amendments, Nos. 210, 211 and 212, have been proposed to this clause. The first seeks to add a definition of the phrase “completion of development”, and links that with the practical completion of the main building contract. In the Government’s opinion, such clarification does not need to appear in statute, but is best dealt with through guidance. That is because property development encompasses a vast number of possible scenarios and any definition of “completion of development” is likely to fall short of being able to be dealt with in all cases. It would, therefore, add to the complexity rather than solving the problem.
In simple cases, the proposed definition might well deliver what is required. However, in many other cases, including phased development, the definition might well result in a more restrictive position than would be ideal. If, as we would prefer, the position is dealt with through guidance, a comprehensive explanation can be given and the approach can be updated as necessary to reflect current industry practice. I do not want to suggest to Opposition Members that we are unsympathetic to their intention, but the issue would be better dealt with in guidance than in statute.
Amendment No. 211 proposes that, in the determination of whether the 30 per cent. development cost threshold is breached, each development of property is assessed separately. Again, although the amendment reflects to an extent the position that may be adopted in practice, the matter is better dealt with in guidance, so that all possible scenarios can be covered flexibly and effectively without complex primary legislation. It is likely that further guidance would be needed to clarify the meaning of the phrase “each development of property”. Little would be achieved by trying to establish that detail in primary legislation.
The guidance on all the UK REIT legislation will be published within three months of Royal Assent, in line with usual practice, and I will endeavour to ensure that that guidance is published as early as possible. Again, there is no lack of sympathy with the intent, but we must take a practical view on how best to achieve the objective. I therefore invite the Committee to reject the amendment.
Amendment No. 212 would change the application of the test in a way that could be costly to the Exchequer. It would mean that if a property was acquired by a UK REIT, subsequently developed and sold after three years, the disposal profit would automatically be tax exempt. To ensure that its disposal profit was tax exempt, a UK REIT would have only to develop a property and hold it for three years, even if there was a clear intention to develop for the purpose of reselling at a profit. That would be a clear subversion of the intention of the regime, which is to encourage the long-term holding of property for investment purposes, and development to the extent that it supports that aim. The amendment would allow property trading activity within the tax-exempt ring fence and would be wide open to abuse.
From a technical standpoint, it would also mean that the tax-exempt ring fence, which has been carefully drawn around schedule A rental profits, would potentially include trading profits as well. The rules dealing with calculation of tax-exempt profits provide a mechanism only for calculating schedule A income, for the simple reason that that is the type of income for which the regime is designed. If the amendment was accepted, consequential changes would be needed to the rest of the legislation that have not been considered.
We understand why the British Property Federation and others would like to support such an amendment: it would provide for them a safe harbour rather than, as they would refer to it, the choppy waters of the current position. However, we are trying to achieve the right balance between providing flexibility and clarity for the industry and ensuring that the revenue base is properly protected. I can promise the Committee that, in the operation of the regime and in the guidance, we will keep a firm but sensitive hand on the tiller. On that basis, I urge the Opposition to drop their amendments.

Mark Francois: I shall speak to amendments Nos. 210 to 212. The proposed REITs regime allows for a company to have essentially two streams of business, one being tax exempt and the other being residual business remaining taxable as a company. Clause 125 deals with the movement of assets from the tax-exempt business to the residual taxable part of the company. In particular, it deals with certain development properties. However, hon. Members will appreciate that the precise definition of a development property is not straightforward. A property company might have one initial intention with regard to a development, but might then quite legitimately do something different to take advantage of commercial circumstances.
I shall give a simple example. A company might develop a building with a view to keeping it as a long-term investment, but it might then receive an attractive offer to sell it at market value that it decides to accept, in contrast to its original plan. With clause 125, the Treasury has given itself certain parameters within which a developed property will always be deemed to fall outside the REITs regime. Our amendments are designed to provide an equivalent degree of certainty for the taxpayer. One can summarise that by saying that what is good for the goose is good for the gander.
Amendment No. 210 would clarify the application of the three-year period within which a disposal of a developed property automatically pushes it into the taxable category. Clause 125 refers to the period of three years beginning with
“the completion of the development.”
In the property industry, the term “completion date” is potentially ambiguous. The amendment would clarify the requirement. It refers to
“practical completion of the main contract for the relevant building works.”
That terminology is well understood in the property industry, and it is essentially the point to which the architect certifies that the building is complete, subject to any minor residual works, which are often referred to in the trade as “snagging”.
The certification by the architect is often used to trigger payments under the construction contract. John Richards, the chief executive of Hammerson plc, recently wrote to me on the issue of REITs. Although he gave a broad welcome to the proposed regime, he expressed a concern about clause 125(7). He said:
“As drafted, the provision will create uncertainties, as after the major part of the development has been executed there is often a long tail of minor works. It should be made clear that for these purposes a development is completed on the date of practical completion of the main building contract.”
Amendment No. 210 would include such well understood industry terminology in the clause to provide clarity in the definition of when the three-year clock effectively begins to tick. That should help to avoid unnecessary disputes between HMRC and taxpayers. It would help to provide clarity, and we hope that the Government will not resist it.
Similarly, amendment No. 211 would remove ambiguity in the interpretation of clause 125 by stipulating that the 30 per cent. cost threshold to define development should be applied separately to different programmes of work. In other words, if a company spends money on a project to improve a property beyond 30 per cent. of the fair value, that would constitute development, whereas spending only 20 per cent. would not. The ambiguity might arise if a renovation project cost 15 per cent. and a separate project some time later cost a third of 15 per cent. The British Property Federation explains the problem in its briefing note as follows:
“The amendment seeks to ensure that each development of property is considered uniquely for the purpose of deciding whether it is in breach of the 30 per cent. fair value limit imposed by the clause.”
So each development property would be considered on its own for the 30 per cent test.
Amendment No. 212 would apply the three-year cut-off point after the development in an equitable manner. The existing clause states that if a property is disposed of within three years of completion, it falls outside the REITs regime. The amendment matches that, saying that if a property were disposed of after three years of completion, it would fall within the REITs regime. Again, that would provide greater certainty all round. In summary, I hope that the amendments are similar, and that the Government will accept them. It is my intention to press amendment No. 210 to a vote.

Edward Balls: I will not repeat the remarks that I made in introducing the amendment, but I should like to say to the hon. Member for Rayleigh, as I tried to explain in detail a moment ago, that we understand the need for clarity here. We understand that there is ambiguity, and that leads to uncertainty. The question is whether the uncertainty can be cleared up through the amendments that he has tabled. Our fear is that what he seeks to do by tabling the amendments will fail in practice. Although he hopes, by introducing those terms to the Bill, to clear up uncertainty, our fear is that all the amendments would do is introduce further ambiguities.
As I said, although it is the case—I accept at face value what the hon. Gentleman says, because it has been put to us by the industry—that the terms that amendments Nos. 210 and 211 introduce are commonly understood by the industry to apply in the normal course of business, I also explained to him that there are a substantial number of exceptions to the normal course of business. The moment that we introduced a definition into primary legislation without clarifying how we will operate in all the exceptional circumstances, I fear that all we would do would be to compound the problem of uncertainty rather than solve it. That is why, as I explained in my opening speech, the solution, rather than adding ambiguity and uncertainty onto ambiguity and uncertainty, would be to use the process of publishing guidance in order to provide the clarity that he seeks.
Although I am absolutely clear that ambiguity in the operation of the tax system must be dealt with, to do that in primary legislation would be a mistake. The common practice is to make clear in statute the law, intent and rules of the game but then, having done so, to use guidance and discussion with Revenue officials to ensure that the application in practice is understood fully by the industry.
I do not in any way intending to pour cold water on the points made by the hon. Gentleman and by people in the industry—those points have also been made to us—but I urge him not to press the matter to a vote. Instead, I ask him to accept that guidance is a better route for dealing with the issues that he raised. I urge the Committee to reject the amendment. [Interruption.]

Mark Francois: We appreciated that little bit of excitement, but I believe the Government have all their troops sitting outside anyway.
I have listened to the Economic Secretary’s argument but I am not convinced. The purpose of amendment No. 210 is to introduce in the Bill a clearly understood term that will allow people in the industry to know exactly where they stand. Therefore, we are not introducing ambiguity into the process but removing it. Everybody in the industry understands what the term means, and if the Economic Secretary were to include it in the Bill, it would give much greater clarity and there would be far fewer test cases and long debates between property developers and officials of HMRC. In that sense, we would make everyone’s life easier. I can understand sometimes why a Treasury Minister would not want such clarity, but there is a good common-sense case for it. As I am not persuaded by the Economic Secretary’s argument, it is my intention to press amendment No. 210 to a vote.

Amendment agreed to.

Amendment proposed: No. 210, in page 110, line 7 [Vol I], at end insert—
‘(7A) For the purposes of this section completion of development shall be taken to occur on practical completion of the main contract for the relevant building works.'.—[Mr. Francois.]

Question put, That the amendment be made:—

The Committee divided: Ayes 11, Noes 13.

Question accordingly negatived.

Clause 125, as amended, ordered to stand part of the Bill.

Clauses 126 to 128 ordered to stand part of the Bill.

Clause 129

Termination by notice: Commissioners

Edward Balls: I beg to move amendment No. 151, in page 111, line 23 [Vol I], leave out ‘Commissioners' and insert ‘Treasury'.
The amendment corrects a drafting error in the legislation and gives powers to make regulations, originally given to Her Majesty’s Revenue and Customs, to the Treasury. That will bring the regulation-making powers into line with those on minor breaches in clause 116, which will also be held by the Treasury.

Amendment agreed to.

Clause 129, as amended, ordered to stand part of the Bill.

Clause 130

Automatic termination for breach of requirement

Amendments made: No. 152, in page 111, line 35 [Vol I], leave out ‘a requirement' and insert
‘Condition 1, 2, 5 or 6'.
No. 153, in page 111, line 40 [Vol I], leave out ‘a requirement' and insert
‘Condition 1, 2, 5 or 6'.—[Ed Balls.]

Clause 130, as amended, ordered to stand part of the Bill.

Clauses 131 to 134 ordered to stand part of the Bill.

Schedule 17

Group Real Estate Investment Trusts: modifications

Edward Balls: I beg to move amendment No. 154, in page 87, line 39 [Vol II], at end insert—
‘(i) as if section 111 applied to UK property rental business (within the meaning given by paragraph 32(1)) carried on by them,'.

Joe Benton: With this it will be convenient to discuss Government amendments Nos. 155 to 162.

Edward Balls: I shall try to move briefly through these amendments to schedule 17, which applies the conditions of the UK REIT regime to groups of companies. Amendment No. 162 has in effect already been discussed, so I shall address it quickly before dealing with the other amendments. It is connected to our earlier discussions on clauses 116 and 130. It provides that in a takeover situation involving two UK REITs, the target of the takeover will not lose its REIT status.
I turn to amendment No. 160. For the purpose of the balance of business test, which requires at least 75 per cent. of a company’s business to be property rental, it was always the Government’s intention to apply a definition of property rental business uniformly across a group UK REIT, whether or not the group’s business is carried out in the UK and regardless of the country of residence of the group member that owns the property. Following consultation, it became clear to us that we had not fully achieved that aim in the Bill as drafted. Amendment No. 160 will ensure that we do.
Amendments Nos. 154 to 156 relate to the treatment of overseas members of a group. They follow recommendations from the British Property Federation and others, and clarify the treatment of UK property held by overseas subsidiary companies for the purpose of the entry charge. They provide that such property will be subject to the entry charge, and that the charge will be assessed as income tax, which will be freestanding—in other words, companies will not be able to offset losses against it. The amendment will ensure that an entry charge is collected in all cases in which the regime confers a tax exemption on a flow of rental income and ensure that no loss of tax or manipulation of the regime can result from unclear drafting.
Amendment No. 161 is also on UK property held by foreign subsidiaries, and will ensure that the Bill reflects the original policy intention that a tax exemption should be conferred when dividends are paid by overseas group members when they relate to property in the UK. The draft legislation provided that only rental income from UK property that was paid up as a dividend by a foreign subsidiary directly to a UK parent company would qualify for tax exemption. The amendment would correct that to provide that dividends relating to rental income on UK property would be tax-exempt where they are paid through an intermediate foreign subsidiary too.
The final amendments to schedule 17, amendments Nos. 157, 158 and 159, consist of minor changes in respect of drafting issues. They would bring the terminology in line with that used elsewhere in the legislation and would clarify which financial statement is to be used in calculating financing costs in relation to the interest rate cover test. They are all minor corrections, and I trust they will not be controversial. On that basis, I commend all the amendments to the Committee.

Mark Francois: I have taken outside advice on this stream of amendments to the schedule and was told that they are all effectively technical or drafting amendments, which, again, do not change any major issue of principle in the Bill. I do not seek to detain the Committee any longer on those, but I give the Chair notice that I have a couple of brief points to make on the stand part debate on the schedule.

Amendment agreed to.

Amendments made: No. 155, in page 87, line 40 [Vol II], after ‘tax', insert
‘under Case VI of Schedule D'.
No. 156, in page 87, line 41 [Vol II], leave out
‘under Chapter 9 of Part 6 of ITTOIA (other income)'.
No. 157, in page 88, line 38 [Vol II], leave out ‘UK property' and insert ‘property rental'.
No. 158, in page 88, line 42 [Vol II], leave out ‘property'.
No. 159, in page 88, line 44 [Vol II], after ‘another', insert
‘, as set out in the financial statement under paragraph 31(2)(a).'.
No. 160, in page 93, line 10 [Vol II], leave out sub-paragraph (2) and insert—
‘(2) Business carried on by a non-UK resident company is property rental business for the purposes of this Part if the business would be property rental business within the meaning given by section 104 if it were carried on by a UK resident company.'.
No. 161, in page 93, line 30 [Vol II], leave out from first ‘dividend' to ‘shall' in line 31 and insert
‘which represents (wholly or partly and directly or indirectly) profits of UK property rental business of a non-UK resident member of the group, such proportion of the dividend as represents those profits'.
No. 162, in page 93, line 39 [Vol II], at end insert—

‘Takeovers

33 (1) This paragraph applies if a company to which Part 4 applies, or a member of a group to which Part 4 applies, becomes a member of a group (or of another group) to which Part 4 applies.
(2) Where this paragraph applies, the following provisions of Part 4 shall not have effect—
(a) section 111 (as modified by paragraphs 9 and 10 above),
(b) section 112 (as modified by paragraph 11 above), and
(c) section 131 (or section 131 as modified by paragraphs 25 and 26 above).'.—[Ed Balls.]

Question proposed, That this schedule, as amended, be the Seventeenth schedule to the Bill.

Mark Francois: In principle, the schedule makes necessary modifications to the REIT regime as it applies to groups of companies. In practice, many of the largest REITs businesses will be groups of companies. Many of the paragraphs of the schedule involve complex interactions with other parts of the tax code as a result. As a Committee, we just made a number of drafting amendments at the behest of the Government that tidy up the legislation rather than fundamentally alter it. As I said, given that, I would like to make two further points on the schedule and the attendant regulations before we agree to it.
On the profit to finance cost ratio of 1:1.25, because of the complexities of a group structure this will inevitably apply slightly differently. The draft regulations, specifically the Real Estate Investment Trusts (Breach of Profit: Financing-Cost Ratio) Regulations 2006, appear to apply the same fairly simple provisions to a group as to a single company in this regard. However, in view of the inherent complexity of group structures, can the Minister assure the Committee that the simplicity of the 1:1.25 test for individual companies will, in practice, as far as possible, still be extended to group REITs, particularly because the formula has to be adjusted for intra-group transactions between component companies? We would like reassurance from the Government on that point.

Rob Marris: Is not the 1.25 for group REITS contained and clarified in the regulations to which the hon. Gentleman referred, under regulation 3?

Mark Francois: The hon. Gentleman is right, in that it is in the regulation. What I want from the Minister is an in-principle assurance that will stand in Hansard that the Government want it to operate the same for groups as for individual companies because of intra-group transfers. I do not want to redesign the universe; I just want the Minister to say in principle yes, and we will be happy. I am glad to know that the hon. Member for Wolverhampton, South-West (Rob Marris) has read the regulations. I would have expected nothing less.
Secondly, the schedule introduces a requirement to create separate accounts for tax purposes for group REITs as opposed to relying on normal commercial accounts from which tax is computed, as would be the normal practice for almost any other company. The detail of this requirement is set out in the draft Real Estate Investment Trusts (Financial Statements of Group Real Estate Investment Trusts) Regulations 2006, which I know we all enjoyed reading last weekend.
However, having defined the requirements, has the Treasury carried out a regulatory impact assessment of the additional cost of providing those accounts? I know that it carried out an RIA to go with the earlier consultation, but has it carried out a specific RIA relating to this particular requirement? We should bear in mind that additional audit requirements are likely to follow because for the purposes of REITs the Government require group REIT companies to provide very specialised accounts, which most other companies and lines of business would not have to prepare.
Having imposed an additional burden on group REITs, bearing in mind that all the accounts will have to be audited, not least if they are companies listed on the stock exchange, can the Economic Secretary reassure the Committee that the Government have considered in detail what the additional burden will be?

Edward Balls: I am glad that the hon. Member for Rayleigh has perused the regulations with such diligence; I do not know whether Mrs. Gauke was involved. I can provide some reassurance on both points. First, he is absolutely right that the ratio is slightly different—

Mark Francois: I have taken advice on the latter point and I am assured that she was not.

Edward Balls: This is a momentous moment.

David Gauke: As moments often are.

Edward Balls: It is the first time in this Finance Bill that Mrs. Gauke has not had a view. [Interruption.] Or she has not expressed it. I hope that it was not due to the lack of diligence of the hon. Member for South-West Hertfordshire in seeking her views.
The hon. Member for Rayleigh raised two points. First, he is absolutely right that in the case of groups the interest rate cover test is different from that of a single company regime, in order to deal with a variety of ways in which a group can finance its activities. But the intention is to achieve exactly the same effect for groups as for single companies. Therefore, the answer to his question—are we trying to achieve the same intention and do we want to achieve the same degree of simplicity?—is yes. I can say that for the record, so that we can be held to account on that issue.
Secondly, the hon. Gentleman asked whether there was a separate RIA for group REITs compared with individual REITs. Our approach was deliberately to raise the issue in consultation with the industry to see whether anything needed to be considered over and above the RIA for single companies. I assure him that the issue was raised and discussed with the industry. In consulting on these clauses it was part of our thinking to ensure that there is not an excessive regulatory burden.
With that reassurance, I hope that the Committee will agree to the proposal.

Mark Francois: I am grateful for the Minister’s assurance on the first point. On the second point, I hope that he realised that it was a legitimate question, because we are talking about preparing specific additional accounts for these companies. Nevertheless, I am grateful for his assurance on that matter, too. We are content to agree to the schedule.

Question put and agreed to.

Schedule 17, as amended, agreed to.

Clauses 135 to 142 ordered to stand part of the Bill.

Clause 143

Section 139 TCGA 1992

Question proposed, That the clause stand part of the Bill.

Mark Francois: The Opposition had tabled an amendment to delete clause 143 from the Bill, for reasons that I will come on to. The Government then tabled a similar amendment at almost exactly the same time—so similar, I understand, that our names were then effectively added to the Government amendment, which is unusual, but essentially, we had exactly the same idea, I suspect for similar reasons. However, I see from the selection list that the amendment has not been selected, so I seek your guidance, Mr. Benton. It is my understanding that we want the clause to be deleted from the Bill and that the Government also want it to be deleted, not least because they were kind enough to write to us in late May and tell us that that was their intention. I would be happy to move deletion, unless the Minister wants to, bearing in mind that we ended up signing his amendment. As a courtesy, I shall allow him to move deletion if he wants.

Joe Benton: It seems straightforward that if the hon. Member for Rayleigh and his party are unhappy with the clause, the effective thing to do would be to vote against it when I put the question.

Mark Francois: I am grateful for that guidance,Mr. Benton. We would have voted against the clause in any event; it was just that I understood that the Government also wanted to get rid of it, but the Minister did not stand.

Edward Balls: I am grateful, Mr. Benton, for your guidance and to the hon. Member for Rayleigh for intervening in the way that he did. There was a danger of the rather soporific flow of the clauses leading us down erroneous paths. I confirm that it is our intention to withdraw the clause from the Bill.

Question put and negatived.

Clause 144

Housing investment trusts: repeal

Question proposed, That the clause stand part of the Bill.

George Young: This will be a brief intervention, as I am sure that the Committee wants to make progress. The clause repeals housing investment trust legislation, so perhaps the best thing to do would be to have a moment’s silence while that stillborn infant is laid to rest.
The clause repeals some provisions of the Finance Act 1996, when HITs were put on the statute book, which raises the question: what were the Government doing between 1997 and 2003, when they started the Barker exercise? Given that they wanted the private sector to invest in housing and given that HITs were not taking off, what activity was going on? Why has it taken them nearly 10 years to come up with legislation that they think will be more effective than were HITs?

Edward Balls: We discussed this issue this morning. As the right hon. Member for North-West Hampshire made clear, the vehicle—the housing investment trust—was introduced by his Government in the Finance Act 1996. Consultation with the industry has confirmed that no company sought to obtain the exemptions that were provided for in the 1996 Act. I explained this morning that the reason for that was that the regime was insufficiently flexible, too heavy-handed and too rigid. The honest answer to the right hon. Gentleman’s question is that we gave the legislation substantial time in which to succeed but it did not do so and, because it failed for a number of years, we have come up with an alternative regime that we intend to succeed. The one thing we cannot be accused of doing is not giving the legislation a chance. As might have been said in “Monty Python”, it turned out that that parrot was well and truly dead.

Question put and agreed to.

Clause 144 ordered to stand part of the Bill.

Clause 145 ordered to stand part of the Bill.

Clause 146

Commencement

Question proposed, That the clause stand part of the Bill.

Mark Francois: We come to the end of our odyssey on REITs, because this is the last clause of part 4 of the Bill. It deals with commencement. It says, in essence, that the REIT regime will come into force on 1 January 2007. If you will indulge me, Mr. Benton, I have a few remarks to make at the end of the debate on this part of the Bill.
For the record, we have gone beyond the scheduled time this afternoon and finished later than we would have done. That is a tribute to the determination of Members from all parts of the Committee to make sure that the REIT regime is scrutinised in detail. I hope that we have done good service.
We touched on a number of important issues. The issue of listing on AIM cropped up again in a number of guises, this time in the context of the balance between commercial and residential property in the REIT regime. Considerable concern was expressed throughout the Committee about the residential element of the REIT regime. We are grateful for the Minister’s commitment that the issue would be reviewed both in the run-up to commencement under clause 146 and afterwards. We will see how that pans out in practice. There are genuine problems that need to be addressed. We hope to return to the issue of AIM-listing on Report.
Under clauses 116 and 130, we amended the clause 106 conditions and turned two of them from red cards to yellow cards. For reasons I will not repeat, that was right. Under clause 125 we kept the Government Whip on his toes and made sure that we pressed the Government on an important matter on which, I hope, they will still listen. On clause 143, with a bit of cross-partisan co-operation we managed to delete an unnecessary clause from the Bill.
I have one last remark. As a personal valedictory, I pay tribute to my old college friend Mr. Michael Halcrow, who was the tax manager at Hammerson plc a few years ago. Like others, such as the British Property Federation, he provided me with a great deal of detailed briefing and advice. These are complicated matters and it is thanks largely to him that I have, I hope, managed to navigate them. I place that on the record.
We look forward to seeing how the regime operates in practice.

Edward Balls: I shall be brief so that we can move on. As the hon. Gentleman said, our aims were debated at length and I set out our position clearly. I also said that it was our intention to ensure that residential as well as commercial property was central to the REITs regime. I did not say that there would be a review; a review can often mean an e-mail address, a consultation document, a team and an office. I said that I would keep the matter closely under review, and that is what I shall do. Just to be clear about it, in discussions today with the hon. Member for Rayleigh and the right hon. Member for North-West Hampshire, I made clear our determination to ensure that the regime works as we all agree it must.
I end by saying that our debates on these clauses have been constructive. First, there were few difficult or contentious issues, which is substantially the result of the excellent consultation conducted by HMRC and the industry; a number of issues had already been dealt with, and the Government were therefore able to respond to concerns before they came before the Committee. Secondly, whether or not it was the result of using outside experts, the Opposition’s amendments did not need to be withdrawn simply because they had no substantive basis; they often pointed to issues that the Government had already been able to address or that we shall address in guidance. I urge the Committee to let the clause stand part of the Bill, so that we can look forward to having a well-functioning UK REITs regime.

Question put and agreed to.

Clause 146 ordered to stand part of the Bill.

Joe Benton: I take this opportunity to remind the Committee that our proceedings will take place in Committee Room 12 next Tuesday morning; we are there only for the one sitting, and we return to this room in the afternoon.
Further consideration adjourned.—[Mr. Heppell.]

Adjourned accordingly at thirteen minutes to Five o'clock till Tuesday 13 June at half-past Ten o'clock.